Financial Crises, Investment Slumps, and Slow Recoveries
IMF Working Papers, June 25, 2021
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- Financial Crises, Investment Slumps, and Slow Recoveries
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Bibliographic details
- Authors: Valerie Cerra, Mai Hakamada, Ruy Lama
- Published: June 25, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484325278.001
Summary
- One of the most puzzling facts in the wake of the Global Financial Crisis (GFC) is that output across advanced and emerging economies recovered at a much slower rate than anticipated by most forecasting agencies.
- The paper investigates mechanics behind the observed slow recovery and associated permanent output losses after financial crises, focusing on financial frictions and investment dynamics.
- Two main contributions:
- Empirical documentation that lower investment during financial crises is the key factor leading to permanent loss of output and total factor productivity (TFP) in the wake of a crisis.
- Development of a DSGE model with financial frictions and capital-embodied technological change that can reproduce the empirical facts.
- The paper evaluates the role of financial policies in stabilizing output and TFP following disruptions in financial markets.
Key findings and empirical results
- Lower investment during financial crises is identified as the key factor driving:
- Permanent loss of output.
- Permanent loss of total factor productivity (TFP).
- Emphasis on the aftermath of financial crises and the presence of hysteresis effects in medium-term TFP and output.
Model and methodology
- A DSGE model is developed featuring:
- Financial frictions.
- Capital-embodied technological change.
- The model is calibrated/used to reproduce empirical facts regarding slow recoveries and to assess policy interventions' effectiveness in stabilizing output and TFP after financial market disruptions.
- Analytical tools referenced include impulse responses and investment dynamics.
Policy implications and evaluation
- The paper evaluates the role of financial policies in stabilizing output and TFP in response to disruptions in financial markets.
- Policy assessment is centered on mitigating investment slumps to prevent permanent output and TFP losses.
Subject tags and keywords
- Subject: Banking crises, Financial crises, Global financial crisis of 2008-2009, Labor, Production, Self-employment, Total factor productivity
- Keywords: aftermath of a financial crises, Banking crises, Global, Global financial crisis of 2008-2009, hysteresis effect, impulse response, investment dynamics, Medium-term TFP loss, Self-employment, Total factor productivity
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- Working Paper