Is Economic Recovery a Myth? Robust Estimation of Impulse Responses

27 Pages Posted: 2 May 2010  

Coen N. Teulings

University of Amsterdam; University of Cambridge

Nick Zubanov

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: April 2010

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.

Keywords: banking crisis, impulse response, panel data

JEL Classification: G01, E27, C53

Suggested Citation

Teulings, Coen N. and Zubanov, Nick, Is Economic Recovery a Myth? Robust Estimation of Impulse Responses (April 2010). CESifo Working Paper Series No. 3027. Available at SSRN: https://ssrn.com/abstract=1597603

Coen N. Teulings (Contact Author)

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Nick Zubanov

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

HOME PAGE: http://www.eur.nl/ese/english/about_ese/staff/profiel_mis/10636/

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