How Can Recessions Be Brought to an End? Effects of Macroeconomic Policy Actions on Durations of Recessions

Abstract

This paper analyzes how effective macroeconomic policy actions are in ending recessions. We also investigate which structural factors help the country to get out of recessions, in other words experience shorter recessions. We implement survival regression analysis and conclude that expansionary monetary policy significantly decreases durations of recessions whereas fixing the exchange rate does not have an effect on the durations of recessions. Expansionary fiscal policy has undesired effects and decreases the probability that recession will end; in other words, increases the durations of recessions. The analysis of country specific factors indicates that emerging countries experience shorter recessions. Recessions in countries with higher trade openness last significantly longer. Financial openness and institutional quality do not have significant effects of recession durations. The empirical analysis takes into account alternative probability distributions and endogeneity of monetary policy actions.

Keywords: Recession, Macroeconomic Policy, Duration Analysis

JEL Classification: E32, E52, E62