Is Economic Recovery a Myth? Robust Estimation of Impulse Responses
There is a lively debate on the persistence of the current banking crisis' impact on GDP. Impulse Response Functions (IRF) estimated by Cerra and Saxena (2008) suggest that the effects of earlier crises were long-lasting. We show that standard estimates of IRFs are highly sensitive to misspecification of the underlying data generation process. Direct estimation of IRFs by a methodology similar to Jorda's (2005) local projection method is robust to misspecifications of the data generation process but yields biased estimates when country fixed effects are added. We propose a simple method to deal with this bias, which we apply to panel data from 99 countries for the period 1974-2001. Our estimates suggest that an average banking crisis leads to an output loss of around 10 percent with little sign of recovery. GDP losses from banking crises are more severe for African countries and economies in transition.
|Date of creation:||2010|
|Contact details of provider:|| Postal: Poschingerstrasse 5, 81679 Munich|
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo-group.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Javier Alvarez & Manuel Arellano, 2003.
"The Time Series and Cross-Section Asymptotics of Dynamic Panel Data Estimators,"
Econometric Society, vol. 71(4), pages 1121-1159, 07.
- Alvarez, J. & Arellano, M., 1998. "The Time Series and Cross-Section Asymptotics of Dynamic Panel Data Estimators," Papers 9808, Centro de Estudios Monetarios Y Financieros-.
- Yanping Chong & Òscar Jordà & Alan M. Taylor, 2010.
"The Harrod-Balassa-Samuelson Hypothesis: Real Exchange Rates and their Long-Run Equilibrium,"
NBER Working Papers
15868, National Bureau of Economic Research, Inc.
- Yanping Chong & Òscar Jordà & Alan M. Taylor, 2012. "The Harrod–Balassa–Samuelson Hypothesis: Real Exchange Rates And Their Long‐Run Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 609-634, 05.
- Chong, Yanping & Jordà, Òscar & Taylor, Alan M., 2010. "The Harrod-Balassa-Samuelson Hypothesis: Real Exchange Rates and their Long-Run Equilibrium," CEPR Discussion Papers 7902, C.E.P.R. Discussion Papers.
- Jon Faust & Jonathan H. Wright, 2008. "Efficient Prediction of Excess Returns," NBER Working Papers 14169, National Bureau of Economic Research, Inc.
- John Y. Campbell & N. Gregory Mankiw, 1987.
"Are Output Fluctuations Transitory?,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 102(4), pages 857-880.
- Campbell, John & Mankiw, Gregory, 1987. "Are Output Fluctuations Transitory?," Scholarly Articles 3122545, Harvard University Department of Economics.
- John Y. Campbell & N. Gregory Mankiw, 1986. "Are Output Fluctuations Transitory?," NBER Working Papers 1916, National Bureau of Economic Research, Inc.
- Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October.
- Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
- Valerie Cerra & Sweta Chaman Saxena, 2008.
"Growth Dynamics: The Myth of Economic Recovery,"
American Economic Review,
American Economic Association, vol. 98(1), pages 439-57, March.
- Sweta Chaman Saxena & Valerie Cerra, 2005. "Growth Dynamics; The Myth of Economic Recovery," IMF Working Papers 05/147, International Monetary Fund.
- Valerie Cerra & Sweta Chaman Saxena, 2007. "Growth dynamics: the myth of economic recovery," BIS Working Papers 226, Bank for International Settlements.
- Valerie Cerra & Sweta C. Saxena, 2005. "Growth Dynamics: The Myth of Economic Recovery," Macroeconomics 0508008, EconWPA.
- Òscar Jordà, 2005. "Estimation and Inference of Impulse Responses by Local Projections," American Economic Review, American Economic Association, vol. 95(1), pages 161-182, March.
- Manuel Arellano & Stephen Bond, 1991.
"Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,"
Review of Economic Studies,
Oxford University Press, vol. 58(2), pages 277-297.
- Tom Doan, "undated". "RATS program to replicate Arellano-Bond 1991 dynamic panel," Statistical Software Components RTZ00169, Boston College Department of Economics.
- Cai, Xiaoming & Den Haan, Wouter, 2009. "Predicting recoveries and the importance of using enough information," CEPR Discussion Papers 7508, C.E.P.R. Discussion Papers.
- Jon Faust & Jonathan H. Wright, 2011. "Efficient Prediction of Excess Returns," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 647-659, May.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_3027. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe)
If references are entirely missing, you can add them using this form.