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Weathering the financial crisis: good policy or good luck?

  • Stephen Cecchetti
  • Michael R King
  • James Yetman

The macroeconomic performance of individual countries varied markedly during the 2007-09 global financial crisis. While China's growth never dipped below 6% and Australia's worst quarter was no growth, the economies of Japan, Mexico and the United Kingdom suffered annualised GDP contractions of 5-10% per quarter for five to seven quarters in a row. We exploit this cross-country variation to examine whether a country's macroeconomic performance over this period was the result of pre-crisis policy decisions or just good luck. The answer is a bit of both. Better-performing economies featured a better-capitalised banking sector, lower loan-to-deposit ratios, a current account surplus, high foreign exchange reserves and low levels and growth rates of private sector credit-to-GDP. In other words, sound policy decisions and institutions reduced their vulnerability to the financial crisis. But these economies also featured a low level of financial openness and less exposure to US creditors, suggesting that good luck played a part.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 351.

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Length: 28 pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:bis:biswps:351
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  1. Olivier J. Blanchard & Mitali Das & Hamid Faruqee, 2010. "The Initial Impact of the Crisis on Emerging Market Countries," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(1 (Spring), pages 263-323.
  2. Michael B. Devereux & James Yetman, 2010. "Leverage Constraints and the International Transmission of Shocks," Working Papers 132010, Hong Kong Institute for Monetary Research.
  3. Rose, Andrew K. & Spiegel, Mark M., 2011. "Cross-country causes and consequences of the crisis: An update," European Economic Review, Elsevier, vol. 55(3), pages 309-324, April.
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  5. Berkmen, S. Pelin & Gelos, Gaston & Rennhack, Robert & Walsh, James P., 2012. "The global financial crisis: Explaining cross-country differences in the output impact," Journal of International Money and Finance, Elsevier, vol. 31(1), pages 42-59.
  6. Andrew K. Rose & Mark M. Spiegel, 2009. "Cross-country causes and consequences of the 2008 crisis: early warning," Working Paper Series 2009-17, Federal Reserve Bank of San Francisco.
  7. Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2011. "Market Freedom and the Global Recession," IMF Economic Review, Palgrave Macmillan, vol. 59(1), pages 111-135, April.
  8. Imbs, Jean, 2010. "The First Global Recession in Decades," CEPR Discussion Papers 7973, C.E.P.R. Discussion Papers.
  9. Andrew Filardo & Jason George & Mico Loretan & Guonan Ma & Anella Munro & Ilhyock Shim & Philip Wooldridge & James Yetman & Haibin Zhu, 2010. "The international financial crisis: timeline, impact and policy responses in Asia and the Pacific," BIS Papers chapters, in: Bank for International Settlements (ed.), The international financial crisis and policy challenges in Asia and the Pacific, volume 52, pages 21-82 Bank for International Settlements.
  10. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 08/224, International Monetary Fund.
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