Pick Your Poison: The Choices and Consequences of Policy Responses to Crises

46 Pages Posted: 12 Dec 2013

See all articles by Kristin J. Forbes

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Michael W. Klein

Tufts University - The Fletcher School of Law and Diplomacy; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 16, 2013

Abstract

Countries choose different strategies when responding to crises. It is challenging to assess the impact of these policy choices on key variables, however, because of endogeneity and selection bias. This paper addresses these challenges by using propensity-score matching to estimate how major reserve sales, large currency depreciations, substantial changes in policy interest rates, and increased controls on capital outflows affect real GDP growth, unemployment, and inflation during two periods marked by crises, 1997 to 2001 and 2007 to 2011. We find that sharp currency depreciations and major reserve sales significantly raise GDP growth (albeit with a lagged effect and after an initial contraction) and also increase inflation (especially depreciations). These policies have weaker benefits and greater costs in emerging and non-OECD economies (especially reserve sales). Estimates also show that increasing interest rates and new controls on capital outflows significantly lower GDP growth.

Keywords: Crisis response, depreciation, capital controls, interest rate policy, foreign exchange reserves, propensity score matching

JEL Classification: F41

Suggested Citation

Forbes, Kristin J. and Klein, Michael W., Pick Your Poison: The Choices and Consequences of Policy Responses to Crises (November 16, 2013). MIT Sloan Research Paper No. 5062-13. Available at SSRN: https://ssrn.com/abstract=2364457 or http://dx.doi.org/10.2139/ssrn.2364457

Kristin J. Forbes (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER)

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Michael W. Klein

Tufts University - The Fletcher School of Law and Diplomacy ( email )

Medford, MA 02155
United States
617-627-2718 (Phone)
617-627-3712 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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