Towards More Resilient Economies: The Role of Well-Functioning Economic Structures

22 Pages Posted: 3 Feb 2017

Date Written: November 22, 2016

Abstract

Economic resilience is essential to better withstand adverse shocks and reduce the economic costs associated with them. We propose different measures of resilience and empirically gauge how countries differ in their shock absorption capacity conditioning on the quality of their economic structures. The paper finds robust evidence that sound labour and product markets, framework conditions and political institutions increase the resilience towards adverse shocks and reduce the incidence of crisis more generally. In the presence of a common shock, a country with weaker economic structures can on average suffer up to twice the output loss in a given year compared to the country at frontier of institutional parameters. In a similar fashion, the likelihood of a severe economic crisis is reduced significantly if a country exhibits most flexible and adaptable institutions. The above exercises can be used to establish a governance process towards more resilient economic structures (as e.g. suggested for the euro area in the so‐called Five Presidents’ Report).

Keywords: economic resilience, common shocks, economic structures, institutions

JEL Classification: E32, L50, J21

Suggested Citation

Sondermann, David, Towards More Resilient Economies: The Role of Well-Functioning Economic Structures (November 22, 2016). ECB Working Paper No. 1984. Available at SSRN: https://ssrn.com/abstract=2910867

David Sondermann (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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