Recovery f rom Recessions

Excerpts from International Evidence on Recovery from Recessions

by Valerie Cerra, Ugo Panizza, and Sweta C. Saxena

Although negative shocks have persistent effects on output on average, this paper shows that macroeconomic policies and the structure of the economy can influence the speed of recovery and mitigate the persistence of the shock. Indeed, monetary and fiscal stimulus and foreign aid can spur a rebound, with impacts that are asymmetrically stronger than in nonrecovery years. Real depreciation and the exchange rate regime also have asymmetric growth effects in a recovery year relative to other years of expansion. Recoveries are more sluggish in open economies, partly because fiscal policy is less effective than in closed economies.

• Fiscal and monetary stimulus and foreign aid can be more effective to boost a rebound from recession relative to the effect of these policies on growth in other stages of the business cycle.
• Real appreciation, fixed and intermediate exchange rate regimes, and trade openness are associated with lackluster recoveries.

Of particular note, we find that fiscal policy is less effective in lifting recovery growth in more open economies.

• In open economies, fiscal stimulus may spill over to higher growth in partner countries by increasing demand for imported foreign goods and services. This finding suggests the need for more coordination in fiscal stimulus across countries, so that the spillover to other countries is offset by equivalent increases in foreign demand fordomestic goods and services.

• We also investigate whether recovery from banking crises is different from other recoveries and find strong evidence in this direction. Banking crisis-related recoveries are more sluggish than other recoveries. However, some policies may be more effective for these situations. Fiscal policy, foreign aid, trade and capital account openness, and the exchange rate regime have disparate impacts on recovery from banking crises relative to other recessions.

GBP/USD Market Moves 26th August

Sterling fell more than 1% against the US dollar today, as risk aversion soared on the back of weaker-than-expected durable goods orders (excluding transportation).

The US Commerce Department today revealed that durable good orders excluding transportation rose by only 0.8% in July, missing Bloomberg’s median analyst estimate for a 0.9% increase. ‘The ex-transportation number came in a little light,’ said Mike O’Rourke of BTIG. ‘Everyone is still looking for some type of correction. No one really wants to chase this market.’ When factoring in transportation, durable goods climbed 4.9% in July, however, beating Bloomberg’s expectations. In the meantime, analysts at BNP Paribas believe that sterling may have to weaken in order for the UK economy to recover from recession. ‘When you look at the situation in the British economy, it is very obvious you need substantial contributions from net exports in the next five to 10 years,’ said BNP Paribas’ Redeker. ‘That means the UK will have to adjust its cost structures drastically or operate with a much cheaper exchange rate.’