Do Crises Induce Reform? Simple Empirical Tests of Conventional Wisdom

Posted: 24 Jan 2006

See all articles by William Easterly

William Easterly

New York University - Department of Economics

Allan Drazen

University of Maryland - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Abstract

We find evidence for the crisis-induces-reform hypothesis at extreme values of the inflation rate and the black market premium. Episodes of extremely high inflation or black market premiums are followed by periods of better performance than episodes of moderately high inflation or black market premiums. We fail to find similar evidence of the crisis hypothesis when crisis is measured as a high current account deficit, a high budget deficit, or a negative per capita growth rate. The pattern of foreign aid disbursements may help explain the results. Foreign aid is reduced at extreme values of inflation or the black market premium, while it is actually increased for more extreme values of the current account deficit and the budget deficit.

Suggested Citation

Easterly, William and Drazen, Allan, Do Crises Induce Reform? Simple Empirical Tests of Conventional Wisdom. Economics and Politics, Vol. 13, No. 2, pp. 129-158, July 2001. Available at SSRN: https://ssrn.com/abstract=876632

William Easterly (Contact Author)

New York University - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

Allan Drazen

University of Maryland - Department of Economics ( email )

College Park, MD 20742-1815
United States
301-405-3477 (Phone)
301-405-7835 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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