1qGLG9p

Recommendations

Info

32 Deleveraging, What Deleveraging Figure 3A.4 Recession, but not a crisis GDP (level) Recession 4.20 4.15 Recession: US 1982 Potential GDP (level) 4.10 4.05 Output gap 4.00 3.95 Actual GDP (level) 3.90 3.85 US, real GDP (log levels) 3.80 76 78 80 82 84 86 In a crisis, the loss of output or the slowdown in output growth is not temporary, but persistent. Indeed, with this background, we can classify three different paths for an economy depending on whether the hit stemming from a crisis is to the level or to the growth rate of potential output, or both. These paths essentially differ as to the mix of policies in response to the wealth loss created by the crisis. Officials need to deal with the direct effects on spending – demand management – and the underlying financial policies that made the crisis possible – structural reform. (i) Type 1 crisis: Permanent loss of output, but potential growth unchanged Figure 3A.5 Type 1 crisis: Persistent output loss Type #1 crisis: Output loss The Swedish banking crisis GDP (level) Potential GDP (level) 4.60 4.55 4.50 4.45 Banking Crisis Output Gap 4.40 4.35 4.30 Actual GDP (level) 4.25 Sweden, Real 4.20 GDP (log levels) 4.15 4.10 81 83 85 87 89 91 93 95 97 99 A Type 1 financial crisis is one in which, unlike a recession, the level of output shows a persistent loss, but potential output growth remains unchanged. That is, the economy, after having contracted for one or more years, resumes growing at the prior growth rate. Unlike in a recession, the following recovery is not abovetrend. As a consequence, the output loss is persistent relative to the trend of output before the crisis. A typical case of a pre-2008 Type 1 crisis is the Swedish banking crisis of the early 1990s. Although the output loss was never recovered
Leverage cycles 33 relative to the trend before the crisis, the economy started to grow again at a pace similar to the pre-crisis rate (thanks to an appropriate set of crisis-management policies). (ii) Type 2 crisis: Persistent fall in output growth Figure 3A.6 Type 2 crisis GDP level Type #2 crisis: Lower growth 5.0 4.9 4.8 The Japanese banking crisis Banking Crisis Output gap Potential GDP (level) 4.7 4.6 4.5 Actual GDP (level) 4.4 4.3 4.2 Japan, Real GDP (log levels) 4.1 81 86 91 96 01 06 A Type 2 financial crisis is one in which the level of output does not contract in any meaningful way, perhaps because bankruptcies or defaults are not allowed and public debt inflates. However, due to the extent of the problems or to wrong policies (lack of bank recapitalisation, monetary policy not sufficiently expansionary, etc.), a steep pace of deleveraging in some sectors of the economy (bank lending, external financing, etc.) spreads over a long period of time, so that potential output growth slows down in a permanent way. A Type 2 crisis could easily be more disruptive than a Type 1 crisis despite a lack of systemic bankruptcies and output contraction, since erroneous policies can make the crisis much more persistent. A typical pre-2008 case of a Type 2 crisis was the Japanese banking crisis of the early 1990s (panel B of Figure 3A.6). Although output never contracted in any meaningful way relative to, say, the Swedish banking crisis, the pace of potential growth of the Japanese economy never reverted to the precrisis rate (due to a combination of wrong policies and supply-side factors, such as demographics). In just a few years from the beginning of the crisis, the output loss relative to the pre-crisis trend was much greater than in Sweden. Moreover, the overall economy never delevered, as public debt ballooned. The risks of a dramatic default, either explicit or implicit, remain. (iii) Type 3 Crisis: Loss of output and slower potential output growth As illustrated in Panel A of Figure 3A.7, the worst type of financial crisis is one in which both the level and the growth rate of potential output are affected sizeably and negatively, due to both the roots of the crisis and the policy response.
Page 1: Geneva Reports on the World Economy
Page 4 and 5: International Center for Monetary a
Page 6 and 7: International Center for Monetary a
Page 8 and 9: Acknowledgements We thank Susan Lun
Page 11 and 12: List of Conference Participants Edm
Page 13 and 14: List of Conference Participants xi
Page 15 and 16: List of Conference Participants xii
Page 17: Foreword Since 1999 the Geneva Repo
Page 20 and 21: 2 Deleveraging, What Deleveraging 1
Page 22 and 23: 4 Deleveraging, What Deleveraging S
Page 24 and 25: 6 Deleveraging, What Deleveraging l
Page 26 and 27: 8 Deleveraging, What Deleveraging i
Page 29 and 30: 2 Global debt analysis: Deleveragin
Page 31 and 32: Global debt analysis: Deleveraging
Page 33 and 34: Global debt analysis: Deleveraging
Page 35: Global debt analysis: Deleveraging
Page 38 and 39: 20 Deleveraging, What Deleveraging
Page 100 and 101:
82 Deleveraging, What Deleveraging
Page 102 and 103:
84 Deleveraging, What Deleveraging
Page 105 and 106:
6 Discussions Morning discussion Ma
Page 107 and 108:
Discussions 89 He also agreed with
Page 109 and 110:
Discussions 91 urged the authors to
Page 111 and 112:
Discussions 93 moving demographic c
Page 113 and 114:
Discussions 95 about potential GDP
Page 115 and 116:
Discussions 97 when there is no com
Page 117 and 118:
Discussions 99 In response to Laure
Page 119 and 120:
Data Appendix Debt typically expres
Page 121 and 122:
References Adrian, T., E. Moench an
Page 123 and 124:
References 105 Jorda, O., M. Schula
Page 125:
It is widely accepted that high lev
show all

1qGLG9p

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?