A new IMF study finds that banking crises typically have a long-lasting impact on the level of output, although growth eventually recovers. Lower employment, investment, and productivity all contribute to sustained output losses.
The global financial crisis is likely to leave long-lasting scars on the world economy, but governments can act to stimulate a quicker revival and counter output losses, according to a new IMF study.
The study finds that, although growth eventually recovers, banking crises typically have a long-lasting impact on the level of output. Lower employment, investment and productivity all contribute to sustained output losses. While there is a strong association between the initial economic conditions and the size of the ultimate output loss, short-run macroeconomic stimuli and sustained structural reform efforts may help reduce ultimate output losses, according to the study released as part of the IMF’s World Economic Outlook (WEO).
The medium-run output loss is not inevitable. Some countries succeed in avoiding it, ultimately exceeding the pre-crisis trajectory. Although post-crisis output dynamics are hard to predict, the evidence suggests that economies which apply macroeconomic stimulus in the short run after the crisis tend to have smaller output losses over the medium run.
The study also finds some evidence that structural reform efforts are associated with better medium-run outcomes, although there is certainly no “one size fits all” when it comes to establishing the right policy after the crisis.
The authors say the analysis has sobering implications for medium-term output prospects in economies that have suffered recent banking crises. The forceful macroeconomic policy response so far, in the form of substantial fiscal and monetary stimuli, should help to mitigate the impact of crises on output. Nevertheless, remaining concerns about losses underscore the importance of implementing reforms to help raise medium-term output and facilitate the shift of resources across sectors following the crisis.
© International Monetary Fund
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