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This paper examines why some financial stress episodes lead to economic downturns. The paper identifies episodes of financial turmoil using a financial stress index (FSI), and proposes an analytical framework to assess the impact of financial stress-in particular banking distress-on the real economy. It concludes that financial turmoil characterized by banking distress is more likely to be associated with severe and protracted downturns than stress mainly in securities or foreign exchange markets. Economies with more arms-length financial systems appear to be particularly vulnerable to sharp contractions, due to the greater procyclicality of leverage in their banking systems.

Banks and Banking --- Finance: General --- Financial Risk Management --- Macroeconomics --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Business Fluctuations --- Cycles --- Price Level --- Inflation --- Deflation --- Financial Crises --- International Financial Markets --- Banking --- Economic growth --- Economic & financial crises & disasters --- Finance --- Economic recession --- Asset prices --- Financial crises --- Currency markets --- Banks and banking --- Recessions --- Prices --- Foreign exchange market --- United States

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This paper looks at the effects of a China slowdown on Emerging Market Economies (Indonesia, Malaysia, and Thailand) and Frontier Developing Economies (Cambodia, Lao P.D.R., and Vietnam) in ASEAN. The main finding is that the impact of China growth shocks on ASEAN has risen since the global financial crisis. A one percent decline in China’s growth implies a 0.3 percent reduction in growth for ASEAN EMEs and 0.2 for FDEs. An important component of inflation is also shared between ASEAN and China. These magnitudes are double what they were two decades ago due to stronger trade and financial linkages. Finally, a slowdown in China, while having real effects, also has a financial impact via slower credit growth and lower equity prices. This is in line with the existence of both portfolio balance and signaling channels, in which ASEAN market participants absorb news on China economic activity as an indicator over domestic growth prospects.

China --- Southeast Asia --- Foreign economic relations --- Asia, Southeast --- Asia, Southeastern --- South East Asia --- Southeastern Asia --- Inflation --- Macroeconomics --- Monetary Policy --- Fiscal Policy --- Open Economy Macroeconomics --- Business Fluctuations --- Cycles --- Price Level --- Deflation --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Economic growth --- Economic recession --- Financial cycles --- Business cycles --- Asset prices --- Financial sector policy and analysis --- Prices --- Recessions --- China, People's Republic of

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This paper estimates the scarring effect of recessions on corporates’ investment and how it is amplified by the level of corporate debt. Our results suggest that the effect of firms’ debt in shaping the response of investment to recessions is statistically significant and economically sizeable, with high debt firms seeing a larger decline in investment than low debt firms. Back-of-the-envelope calculations suggest that firms’ debt accounts for at least 28 percent of the average medium-term decline of investment following a recession. This effect is especially larger for firms that are credit constrained—small and less profitable firms, as well as firms with high share of short-term debt—and that therefore may find it more difficult to rollover or raise new funds to invest in new projects. The results are robust to several checks, including to various sub-samples, alternative measures of recessions and explanatory variables, and a large set of controls.

Macroeconomics --- Economics: General --- Public Finance --- Investment --- Capital --- Intangible Capital --- Capacity --- Business Fluctuations --- Cycles --- National Government Expenditures and Related Policies: Infrastructures --- Other Public Investment and Capital Stock --- Economic & financial crises & disasters --- Economics of specific sectors --- Economic growth --- Public finance & taxation --- Economic recession --- Capital spending --- Expenditure --- Currency crises --- Informal sector --- Economics --- Recessions --- Capital investments --- Portugal

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The deep recession in many of the emerging market transition economies of Europe and Central Asia caused by the COVID-19 crisis has raised fears of long-term damage to potential output through scarring and hysteresis. These economies were also hit hard by the great recession caused by the global financial crisis. This paper provides empirical estimates of the impact of the great recession on the subsequent medium-term level of real gross domestic product in a sample of 65 middle-income countries. It finds evidence of a significant hysteresis parameter in these countries. The paper also examines how the combination of a hysteresis parameter and a positive fiscal multiplier can mean that a countercyclical fiscal expansion that successfully mitigates the output loss in a recession need not worsen public debt levels in the medium to long term because of its positive impact on potential output and thus the tax base.

Business Cycles and Stabilization Policies --- Coronavirus --- Countercyclical Policy --- COVID-19 --- Economic Policy, Institutions and Governance --- Economic Recession --- Emerging Market Economies --- Fiscal and Monetary Policy --- Fiscal Policy --- Global Financial Crisis --- Hysteresis --- Macroeconomics and Economic Growth --- Pandemic Response --- Public Debt --- Public Sector Development

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"There have been two global financial crises in the past century: the Great Depression of the 1930s and the Great Recession that began in 2008. Both featured loose credit, precarious real estate and stock market bubbles, suspicious banking practices, an inflexible monetary system, and global imbalances; both had devastating economic consequences. In both cases, people in the prosperous decade preceding the crash believed they were living in a post-volatility economy, one that had tamed the cycle of boom and bust. When the global financial system began to totter in 2008, policymakers were able to draw on the lessons of the Great Depression in order to prevent a repeat, but their response was still inadequate to prevent massive economic turmoil on a global scale. In Hall of Mirrors, renowned economist Barry Eichengreen provides the first book-length analysis of the two crises and their aftermaths. Weaving together the narratives of the 30s and recent years, he shows how fear of another Depression greatly informed the policy response after the Lehman Brothers collapse, with both positive and negative results. On the positive side, institutions took the opposite paths that they had during the Depression; government increased spending and cut taxes, and central banks reduced interest rates, flooded the market with liquidity, and coordinated international cooperation. This in large part prevented the bank failures, 25% unemployment rate, and other disasters that characterized the Great Depression. But they all too often hewed too closely and too literally to the lessons of the Depression, seeing it as a mirror rather than focusing on the core differences. Moreover, in their haste to differentiate themselves from their forbears, today's policymakers neglected the constructive but ultimately futile steps that the Federal Reserve took in the 1930s. While the rapidly constructed policies of late 2008 did succeed in staving off catastrophe in the years after, policymakers, institutions, and society as a whole were too eager to get back to normal, even when that meant stunting the recovery via harsh austerity policies and eschewing necessary long-term reforms. The result was a grindingly slow recovery in the US and a devastating recession in Europe. Hall of Mirrors is not only a monumental work of economic history, but an essential exploration of how we avoided making only some of the same mistakes twice--and why our partial remedy makes us highly susceptible to making other, equally important mistakes yet again"--

Depressions --- Economic policy --- Global Financial Crisis, 2008-2009. --- Crisis económica --- Política económica --- Crisis financiera --- economic policy --- history --- economic recession --- crisis management --- impact study --- euro area --- United States --- Economic nationalism --- Economic planning --- National planning --- State planning --- Economics --- Planning --- National security --- Social policy --- Global Economic Crisis, 2008-2009 --- Subprime Mortgage Crisis, 2008-2009 --- Financial crises --- Great Depression, 1929 --- Stock Market Crash, 1929 --- History --- Historia --- Globalización --- Global Financial Crisis, 2008-2009 --- E-books