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Title:Is economic recovery a myth? Robust estimation of impulse responses PDF Logo
Authors:Teulings, Coen N.
Zubanov, Nick
Issue Date:2010
Series/Report no.:CESifo working paper Monetary Policy and International Finance 3027
Abstract:There is a lively debate on the persistence of the current banking crisis' impact on GDP. Impulse Response Functions (IRF) estimated by Cerra and Saxena (2008) suggest that the effects of earlier crises were long-lasting. We show that standard estimates of IRFs are highly sensitive to misspecification of the underlying data generation process. Direct estimation of IRFs by a methodology similar to Jorda's (2005) local projection method is robust to misspecifications of the data generation process but yields biased estimates when country fixed effects are added. We propose a simple method to deal with this bias, which we apply to panel data from 99 countries for the period 1974-2001. Our estimates suggest that an average banking crisis leads to an output loss of around 10 percent with little sign of recovery. GDP losses from banking crises are more severe for African countries and economies in transition.
Subjects:banking crisis
impulse response
panel data
JEL:G01
E27
C53
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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