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

49 Pages Posted: 2 Mar 2015

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: February 2015

Abstract

Countries choose different strategies when responding to crises. An important challenge in assessing the impact of these policies is selection bias with respect to relatively time-invariant country characteristics, as well as time-varying values of outcome variables and other policy choices. This paper addresses this challenge 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 none of these policies yield significant improvements in growth, unemployment, and inflation. Instead, a large increase in interest rates and new capital controls are estimated to cause a significant decline in GDP growth. Sharp currency depreciations may raise GDP growth over time, but only with a lagged effect and after an initial contraction.

Suggested Citation

Forbes, Kristin J. and Klein, Michael W., Pick Your Poison: The Choices and Consequences of Policy Responses to Crises (February 2015). NBER Working Paper No. w20987. Available at SSRN: https://ssrn.com/abstract=2572146

Kristin J. Forbes (Contact Author)

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

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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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