Do recessions permanently change output?

Beaudry, Paul; Koop, Gary

doi:10.1016/0304-3932(93)90042-e

“…First, we document that defaults are indeed associated with larger than average recessions (note that so far, we have only documented an association between recessions and defaults-more precisely, that the latter are typically preceded by the former-but not that the fact that recessions are more pronounced prior to default events). Second, we rerun the baseline regressions of Table 4 controlling for the current depth of the recession, captured by Beaudry and Koop's (1993) CDR variable, to see whether the link between defaults and growth is due to the omission of the recession depth variable. Table 10 reports the results from the first step, showing that the depth of the recession is significantly larger for recessions leading to debt defaults.…”

Section: Growth-inducing Defaults?mentioning

confidence: 99%

The elusive costs of sovereign defaults

Yeyati

¹

,

Panizza

²

2011

Journal of Development Economics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The views and interpretations in this document are those of the authors and should not be attributed to the Inter-American Development Bank, or to any individual acting on its behalf. This paper may be freely reproduced provided credit is given to the Research Department, InterAmerican Development Bank. Terms of use: Documents inThe Research Department (RES) produces a quarterly newsletter, IDEA (Ideas for Development in the Americas), as well as working papers and books on diverse economic issues. To obtain a complete list of RES publications, and read or download them please visit our web site at: http://www.iadb.org/res. 3 Abstract *Few would dispute that sovereign defaults entail significant economic costs, including, most notably, important output losses. However, most of the evidence supporting this conventional wisdom, based on annual observations, suffers from serious measurement and identification problems. To address these drawbacks, we examine the impact of default on growth by looking at quarterly data for emerging economies. We find that, contrary to what is typically assumed, output contractions precede defaults. Moreover, we find that the trough of the contraction coincides with the quarter of default, and that output starts to grow thereafter, indicating that default episode seems to mark the beginning of the economic recovery rather than a further decline. This suggests that, whatever negative effects a default may have on output, those effects result from anticipation of a default rather than the default itself.* We would like to thank Eduardo Cavallo and other participants in the December 2005 IPES pre-conference, and we wish to thank Mariano Alvarez for excellent research assistance. The views expressed in this paper are the authors' and do not necessarily reflect those of the Inter-American Development Bank.

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“…Thus positive and negative shocks to growth of equal absolute magnitude would have equal short and long run impacts on output growth. However, it is now widely recognised that the symmetry assumption may be tenuous, see Hamilton (1989), Bradley and Jansen (1997), Beaudry and Koop (1993), Jansen and Oh (1999) and Henry and Olekalns (2002) inter alia. Forecasts derived from (1) would be biased if the data were not fully consistent with the symmetry assumption (Beaudry & Koop, 1993).…”

Section: The Empirical Modelmentioning

confidence: 99%

“…To relax the symmetry constraint, our paper employs the idea, first found in Beaudry and Koop (1993), that the "current depth of recession" (hereafter CDR)…”

Section: The Empirical Modelmentioning

confidence: 99%

“…The CDR approach treats the historical maximum level of output as an attractor that influences the dynamics of output growth when output falls below its previous peak. Beaudry and Koop (1993) hypothesise that there is a non-linearity in this "peak reversion"; the further output falls from its peak, the greater is the pressure that builds up for output to return to its historical maximum.…”

Section: The Empirical Modelmentioning

confidence: 99%

See 1 more Smart Citation

Do stock market returns predict changes to output? Evidence from a nonlinear panel data model

Henry

¹

,

Olekalns

²

,

Thong

³

2004

Empirical Economics

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Recent empirical work suggests a predictive relationship between stock returns and output growth. We employ quarterly data from a panel of 27 countries to test whether stock returns as useful in predicting growth. Unlike previous research, our approach allows for the possible non-linear effect of recessions on the growth-return relationship. There is strong evidence to suggest that a linear model would be misspecified and provide potentially misleading inference. Using a switching regression approach, we find evidence that returns are most useful in predicting growth when the economy is in recession.JEL Code: E32

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“…5 As examples, Koop and Potter (1999) cite the Markov-switching model proposed by Hamilton (1989), and the studies by Beaudry and Koop (1993) and Pesaran and Potter (1997). Othe examples are DeLong and Summers (1986), Potter (1995), and Rothman (1991).…”

Section: Introductionmentioning

confidence: 99%

Real Wages and Business Cycle Asymmetries

Woitek¹

2005

Ifo Survey Data in Business Cycle and Monetary Policy Analysis

19

0

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may REAL WAGES AND BUSINESS CYCLE ASYMMETRIES AbstractThe cyclicality of real wages has important implications for the validity of competing business cycle theories. However, the empirical evidence on the aggregate level is inconclusive. Using a threshold vector autoregressive model for the US and Germany to condition the relationship between real wages and business fluctuations on the phase of the cycle, it is demonstrated that the inconclusive evidence is not only caused by measurement problems, estimation method and composition bias as discussed in the literature. In addition, one should also consider whether the economy is in an upswing or a downswing. In general, the evidence for countercyclical wages is stronger in Germany than for the US, but taken together there is no clear systematic pattern.JEL classification: C32, E32.

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Do recessions permanently change output?

Cited by 380 publications

References 12 publications

The elusive costs of sovereign defaults

The elusive costs of sovereign defaults

Do stock market returns predict changes to output? Evidence from a nonlinear panel data model

Real Wages and Business Cycle Asymmetries

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