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The 2008 Financial Crisis and Potential Output in Asia: Impact and Policy Implications

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  • Park, Cyn-Young

    ()
    (Asian Development Bank)

  • Majuca, Ruperto

    ()
    (Philippine Institute for Development Studies (PIDS))

  • Yap, Josef

    ()
    (Philippine Institute for Development Studies (PIDS))

Abstract

Monitoring the behavior of potential output helps policymakers implement appropriate policies in response to an economic crisis. In the short-run, estimates of the output gap can guide the timing of the implementation and withdrawal of stimulus measures. In the medium- to long-term, these estimates can also provide the basis for gauging productive potential and, hence, guide policies to support sustainable, non-inflationary output growth. In this paper, we investigate the post-crisis behavior of potential output in emerging East Asian economies by employing the Markov-switching model to account for structural breaks. Results show that after the 1997/98 Asian financial crisis, potential output in Hong Kong, China; the Republic of Korea (Korea); Singapore; and Malaysia reverted to levels consistent with trends prior to the crisis. While there were permanent drops in potential output for both Thailand and Indonesia, growth rates returned to pre-crisis trends. The People’s Republic of China (PRC); Taipei,China; and the Philippines are special cases as explained in the report. Econometric estimates of a simple growth model show that the differences among the patterns of post-crisis recovery can be attributed to the investment-to-gross-domestic-product (GDP) ratio; macroeconomic policies; exchange rate behavior; and productivity, which is proxied by the level of technological activity. These results can be used to guide policy in the aftermath of the 2008 global financial crisis.

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Bibliographic Info

Paper provided by Asian Development Bank in its series Working Papers on Regional Economic Integration with number 45.

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Length: 44 pages
Date of creation: 01 Apr 2010
Date of revision:
Handle: RePEc:ris:adbrei:0045

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Keywords: Potential output; Markov-switching model; structural break; global crisis; East Asia;

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