Abstract
This study finds that the set of policies that favor liberalization in credit markets (regulatory quality) are negatively correlated with countries’ resilience to the recent recession as measured by output growth in 2008 and 2009. The Global nature of the recession and the cross-country heterogeneity of its depth provide a unique opportunity to examine the link between the structural characteristics of economic and social systems before and after the crisis.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
We follow Rose and Spiegel (2009a) and examine all countries/territories with real GDP per capita of at least 10,000 in 2003, as well as those with real GDP per capita of at least 4,000 and a population of at least one million. See Table A1 in the data appendix for the list of all countries considered and their ranking in terms of regulatory quality.
The GDP in the fourth quarter of 2009 is an IMF forecast.
We have also experimented with alternative indicators for rating and results are qualitatively the same.
The same is true for the coefficient of short-term external debt which is the exact variable used by those authors, although we do not report it.
Indeed, the regressors are 29 (see data appendix) but, in order to preserve the sample size of our underlying regressions, we drop External Debt to Gross National Income ratio and Debt to Gross National product. This allows us to run regressions with a balanced panel of 42 countries.
For technical details, see Koop (2003).
This amounts at setting the g-hyperparameter equal to the sample size. As a robustness check, we employ the “hyper-g prior” by Liang and others (2008) which has been used by Zeugner and Feldkircher (2009) in the context of growth regressions. Qualitative results are confirmed.
We attribute an equal prior probability of 2−K to each model. This means that each regressor has a prior probability 0.5 of being included, independently of the inclusion of any other regressor.
We exclude Bahrein, Belgium, Cyprus, Iceland, Ireland, Luxembourg, Malta, the Netherlands, Hong Kong, Singapore, Switzerland, the United Kingdom, Mauritius, Panama, and Seychelles.
References
Acemoglu, D., Johnson, S., and Robinson, J.A., 2005, “Institutions as a Fundamental Cause of Long-Run Growth,” in Handbook of Economic Growth, Vol. 1, ed. by P. Aghion and S. Durlauf (Amsterdam, Elsevier), Chapter 6, pp. 385–472.
Beck, T., Demirguc-Kunt, A., and Levine, R., 1999, “A New Database on Financial Development and Structure,” Policy Research Working Paper Series 2146 (The World Bank).
Beck, T., Demirguc-Kunt, A., and Levine, R., 2009, “Financial Institutions and Markets Across Countries and Over Time—Data and Analysis,” Policy Research Working Paper Series 4943 (The World Bank).
Beck, T., Hesse, H., Kick, T., and von Westernhagen, N., 2009, “Bank Ownership and Stability: Evidence from Germany,” Tilburg University, Unpublished manuscript.
Berglof, E., Korniyenko, Y., Plekhanov, A., and Zettelmeyer, J., 2009, “Understanding the Crisis in Emerging Europe,” Working Paper series 109 (EBRD).
Blanchard, O., Faruqee, H., and Das, M., 2010, “The Initial Impact of the Crisis on Emerging Market Countries,” Brooking Papers of Economic Activity, forthcoming.
Caprio, G.J., and Honohan, P., 2002, “Banking Policy and Macroeconomic Stability—an Exploration,” Policy Research Working Paper Series 2856 (The World Bank).
Cetorelli, N., and Goldberg, L.S., 2010, “Globalized Banks: Lending to Emerging Markets in the Crisis,” IMF Economic Review, Vol. 58, No. 2.
Diaz-Alejandro, C., 1985, “Good-bye Financial Repression, Hello Financial Crash,” Journal of Development Economics, Vol. 19, pp. 1–24.
Easterly, W., Islam, R., and Stiglitz, G., 2000, “Shaken and Stirred: Explaining Growth Volatility,” Discussion Paper (The World Bank).
Fernandez, C., Ley, E., and Steel, M.F.J., 2001, “Model Uncertainty in Cross-country Growth Regressions,” Journal of Applied Econometrics, Vol. 16, No. 5, pp. 563–576.
Goldberg, L.S., 2009, “Understanding Banking Sector Globalization,” IMF Staff Papers, Vol. 56, No. 1, pp. 171–197.
Gwartney, J., and Lawson, R., 2003a, “The Concept and Measurement of Economic Freedom,” European Journal of Political Economy, Vol. 19, No. 3, pp. 405–430.
Gwartney, J., and Lawson, R., 2003b, “What Have We Learned from the Measurement of Economic Freedom?” Proceedings, Federal Reserve Bank of Dallas, (October), 217–238.
Hellmann, T., Murdock, K., and Stiglitz, J., 1997, “Financial Restraint: Towards a New Paradigm,” in The Role of Government in East Asian Economic Development Comparative Institutional Analysis, ed. by M. Aoki, H.-K. Kim, and M. Okuno-Fujiwara (Oxford, Clarendon Press), pp. 163–207.
Imbs, J., 2010, “The First Global Recession in Decades,” IMF Economic Review, Vol. 58, No. 2.
Kass, R.E., and Wasserman, L., 1996, “The Selection of Prior Distributions by Formal Rules,” Journal of the American Statistical Association, Vol. 91, pp. 1343–1370.
Kaufmann, D., Kraay, A., and Zoido-Lobaton, P., 2002, “Governance Matters II—Updated Indicators for 2000–01,” Policy Research Working Paper Series 2772 (The World Bank).
Koop, G., 2003, Bayesian Econometrics (New York, John Wiley).
Lane, P.R., and Milesi-Ferretti, G.M., 2002, “External Wealth, the Trade Balance, and the Real Exchange Rate,” European Economic Review, Vol. 46, No. 6, pp. 1049–1071.
Lane, P.R., and Milesi-Ferretti, G.M., 2010, “The Cross-Country Incidence of the Global Crisis,” IMF Economic Review, Vol. 58, No. 2.
Levine, R., 2005, “Finance and Growth: Theory and Evidence,” in Handbook of Economic Growth, Vol. 1, ed. by P. Aghion and S. Durlauf (Amsterdam, Elsevier), Chapter 12, pp. 865–934.
Liang, F., Paulo, R., Molina, G., Clyde, M.A., and Berger, J.O., 2008, “Mixtures of Priors for Bayesian Variable Selection,” Journal of the American Statistical Association, Vol. 103, pp. 410–423.
Rose, A.K., and Spiegel, M.M., 2009a, “Cross-Country Causes and Consequences of the 2008 Crisis: Early Warning,” NBER Working Papers 15357 (National Bureau of Economic Research, Inc).
Rose, A.K., and Spiegel, M.M., 2009b, “Cross-Country Causes and Consequences of the 2008 Crisis: International Linkages and American Exposure,” NBER Working Papers 15358 (National Bureau of Economic Research, Inc).
Sala-I-Martin, X., Doppelhofer, G., and Miller, R.I., 2004, “Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach,” American Economic Review, Vol. 94, No. 4, pp. 813–835.
Zeugner, S., and Feldkircher, M., 2009, “Benchmark Priors Revisited: On Adaptive Shrinkage and the Supermodel Effect in Bayesian Model Averaging,” IMF Working Papers 09/202 (International Monetary Fund).
Additional information
*Domenico Giannone is Professor at the Université libre de Bruxelles, Michele Lenza is an Economist in the Directorate General Research of the European Central Bank, and Lucrezia Reichlin is Professor at the London Business School. The authors thank, for suggestions and criticism, Antonio Estache, Philippe Weil, Stefan Zeugner, the participants at the PSE, BdF, IMF Conference on “Economic Linkages, Spillovers and the Financial Crisis,” our discussant Galina Hale, two anonymous referees and the editors, Pierre-Olivier Gourinchas and M. Ayhan Kose.