Balance Sheet Effects, Growth, and Crises

15 Pages Posted: 27 Aug 2007

Abstract

This paper addresses two questions: are currency crises predicted by increases in a central bank's external and contingent liabilities relative to assets, and do these "balance sheet effects" generate persistent output losses following a crisis? I find empirical evidence that the answer to both questions is yes. I use data on stocks of gross external assets and liabilities for 167 countries over 1973-2003, in an unbalanced panel probit regression to obtain robust estimates of the probability and determinants of a post-crisis recession. Several single and simultaneous equation specifications support the idea that the output cost of a currency crisis depends on its transmission mechanism. Specifically, a recession is likely to be severe if it is preceded by a crisis that works its way through the financial sector. In addition, the results show that measures of contingent liabilities, capital flight, and lack of financial depth are significant predictors of costly crises.

Suggested Citation

Shankar, Rashmi, Balance Sheet Effects, Growth, and Crises. Review of International Economics, Vol. 15, No. 4, pp. 720-734, September 2007, Available at SSRN: https://ssrn.com/abstract=1009902 or http://dx.doi.org/10.1111/j.1467-9396.2007.00683.x

Rashmi Shankar (Contact Author)

World Bank ( email )

1818 H Street N.W.
Washington, DC 20433
United States

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