Towards More Resilient Economies: The Role of Well-Functioning Economic Structures
22 Pages Posted: 3 Feb 2017
Date Written: November 22, 2016
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: Suggested Citation