Financial Crises, Investment Slumps, and Slow Recoveries

By Valerie Cerra, Mai Hakamada, Ruy Lama

June 25, 2021

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Valerie Cerra, Mai Hakamada, and Ruy Lama. Financial Crises, Investment Slumps, and Slow Recoveries, (USA: International Monetary Fund, 2021) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

One of the most puzzling facts in the wake of the Global Financial Crisis (GFC) is that output across advanced and emerging economies recovered at a much slower rate than anticipated by most forecasting agencies. This paper delves into the mechanics behind the observed slow recovery and the associated permanent output losses in the aftermath of the crisis, with a particular focus on the role played by financial frictions and investment dynamics. The paper provides two main contributions. First, we empirically document that lower investment during financial crises is the key factor leading to permanent loss of output and total factor productivity (TFP) in the wake of a crisis. Second, we develop a DSGE model with financial frictions and capital-embodied technological change capable of reproducing the empirical facts. We also evaluate the role of financial policies in stabilizing output and TFP in response to disruptions in financial markets.

Subject: Banking crises, Financial crises, Global financial crisis of 2008-2009, Labor, Production, Self-employment, Total factor productivity

Keywords: Aftermath of a financial crises, Banking crises, Global, Global financial crisis of 2008-2009, Hysteresis effect, Impulse response, Investment dynamics, Medium-term TFP loss, Self-employment, Total factor productivity

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/170
Stock No:

WPIEA2021170
ISBN:

9781484325278
ISSN:

1018-5941

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