Their effect on the economy is persistent and it often exceeds initial projections.
Economic resilience can be strengthened by implementing policies aimed at mitigating both the risks and consequences of severe crises. In the case of risks this implies being able to monitor home-grown vulnerabilities; coping with the consequences means identifying policy settings and mechanisms that can be put in place ex ante so as to help absorbing the impact of a severe downturn.
When risk-mitigating measures involve a trade-off between growth and crisis risk, the most cost-effective actions need to be identified, spanning both macroeconomic and structural policies.
Note: The X axis plots the effect of policies on fragility; fragility is defined as higher likelihood of a financial crisis (policies with red outline) or a higher GDP (negative) tail risk. Three types of financial crises are considered: currency, banking and twin crises. Tail risk is defined as the effect of a policy variable on the bottom 10% of the distribution for quarterly GDP growth. The chart reports coefficients corresponding either to elasticities or marginal effects, depending on the policy considered. Institutional quality indicators are associated with both growth and lower fragility; labour and product market policies generally affect growth, with little or no impact economic risk. Growth fragility trade-offs exist when considering macro prudential and financial markets policies. The yellow dot under the green area (Quality of instiutions) represents the effect on growth and fragility of a free-floating exchange rate, while the one under the light blue area (Labour market) represents automatic stabilisers.
|Vulnerability indicators (updated 17 November 2015)||For more information, please contact Alain de Serres|