World Economic OutlookWorld Economic OutlookApril 2009April 2009

Chapter IIIChapter IIIFrom Recession to From Recession to

Recovery: How Soon Recovery: How Soon and How Strong?and How Strong?

Prepared by:Prepared by:Prakash Kannan, Alasdair Scott and Prakash Kannan, Alasdair Scott and

Marco TerronesMarco Terroneswith support from Gavin Asdorian and with support from Gavin Asdorian and

Emory OakesEmory Oakes

QuestionsQuestions

Are recessions and recoveries associated Are recessions and recoveries associated with financial crises different from with financial crises different from others?others?

What are the main features of globally What are the main features of globally synchronized recessions?synchronized recessions?

Can countercyclical policies help shorten Can countercyclical policies help shorten recessions and strengthen recoveries?recessions and strengthen recoveries?

We Examine Business Cycles in 21 Advanced

Economies … Excluding the current recessions,

there were 122 recessions since 1960. Of which: 15 were associated with financial crises 37 were globally synchronized (1975,

1980 and 1992). 6 were both associated with financial

crises and globally synchronized.

0 2 4 6 8

Financialcrises which

are highlysynchronized

Financialcrises

All recessions

Average duration (quarters)

Additional

Recessions and Recoveries are Recessions and Recoveries are Longer when Global and Longer when Global and

associated w/ Financial Crises …associated w/ Financial Crises …Recessions Recoveries

0 3 6 9 12 15

Financialcrises which

are highlysynchronized

Financialcrises

All recessions

Average time until recovery to previous peak(quarters)

Additional

96

98

100

102

104

106

108

0 2 4 6 8 10 12

Mean time to trough for

financial crises

Mean time to trough

for all other

recessions

Financial crises

All other recessions

Mainly Reflecting Consumption Mainly Reflecting Consumption Dynamics …Dynamics …

(Median = 100 at (Median = 100 at tt = 0; peak in output at = 0; peak in output at tt = 0) = 0)

Financial Crises

96

98

100

102

104

106

108

0 2 4 6 8 10 12

Mean time to trough

for all other

recessions

Mean time to trough for highly

synchronized recessions

All other recessions

Highly synchronized

recesions

Highly Synchronized Recessions

85

90

95

100

105

0 2 4 6 8 10 12

Mean time to trough for

financial crises

Mean time to trough

for all other

recessions

Financial crises

All other recessions

Which, in turn, Reflect House Prices Which, in turn, Reflect House Prices Dynamics …Dynamics …

(Median = 100 at (Median = 100 at tt = 0; peak in output at = 0; peak in output at tt = 0) = 0)

Financial Crises

85

90

95

100

105

0 2 4 6 8 10 12

Mean time to trough

for all other

recessions

Mean time to trough for highly

synchronized recessions

All other recessions

Highly synchronized

recesions

Highly Synchronized Recessions

95

100

105

110

115

120

0 2 4 6 8 10 12

Mean time to trough for

financial crises

Mean time to trough

for all other

recessions

Financial crises

All other recessions

Exports Play Important Role in Exports Play Important Role in Recovery …Recovery …

(Median = 100 at (Median = 100 at tt = 0; peak in output at = 0; peak in output at tt = 0) = 0)

Financial Crises

95

100

105

110

115

120

0 2 4 6 8 10 12

Mean time to trough

for all other

recessions

Mean time to trough for highly

synchronized recessions

All other recessions

Highly synchronized

recesions

Highly Synchronized Recessions

Policies Help Shorten Recessions … Policies Help Shorten Recessions … Fiscal Stimulus is Effective in Fiscal Stimulus is Effective in

Financial Crises … Financial Crises … (Probability of remaining in a recession beyond a certain (Probability of remaining in a recession beyond a certain

number of quarters)number of quarters)

0.0

0.2

0.4

0.6

0.8

1.0

0 1 2 3 4 5 6 7 8 9 10

Quarters

Full sample

Financial crises

Financial crises with high fiscal response

… … Effectiveness of Fiscal Policy Effectiveness of Fiscal Policy Affected by Public Debt Levels …Affected by Public Debt Levels …

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0 0.1 0.2 0.4 0.5 0.6 0.7 0.8 0.9 1.1 1.2 1.3 1.4Debt-to-GDP

Marginal effect of fiscal stimulus

-4

-2

0

2

4

6

-8 -6 -4 -2 0 2 4 6

Current Recessions Likely to Be Current Recessions Likely to Be Severe … Severe … (Median log differences from one year earlier; (Median log differences from one year earlier;

peak in output level at peak in output level at tt = 0; quarters on x-axis) = 0; quarters on x-axis)

Output

Current U.S. recession 50 percent interval of previous recessions

-2

0

2

4

6

-8 -6 -4 -2 0 2 4 6

Private Consumption

-1

0

1

2

3

4

-8 -6 -4 -2 0 2 4 6

Unemployment RateUnemployment Rate(median percentage point difference from (median percentage point difference from

one year earlier)one year earlier)

-30

-20

-10

0

10

20

-8 -6 -4 -2 0 2 4 6

Residential Investment

-5

0

5

10

15

-8 -6 -4 -2 0 2 4 6

… … with Potentially Weak Recoveries …with Potentially Weak Recoveries …(Median log differences from one year earlier; peak in output level at (Median log differences from one year earlier; peak in output level at tt = 0; = 0;

quarters on x-axis)quarters on x-axis)

CreditCredit

-5-4-3-2-10123

-8 -6 -4 -2 0 2 4 6

Nominal Interest RateNominal Interest Rate(median percentage point difference (median percentage point difference

from one year earlier)from one year earlier)

-10

-5

0

5

10

-8 -6 -4 -2 0 2 4 6

House PricesHouse Prices

0

1

2

3

4

5

6

-8 -6 -4 -2 0 2 4 6

Government ConsumptionGovernment Consumption

-50-40-30-20-10

0102030

-8 -6 -4 -2 0 2 4 6

Equity PricesEquity Prices

Current U.S. recession 50 percent interval of previous recessions

Policy MessagePolicy Message

The current recessions are likely to The current recessions are likely to be long lasting and severe with weak be long lasting and severe with weak recoveries ….recoveries ….

Monetary and fiscal policies can help Monetary and fiscal policies can help reduce the duration of the current reduce the duration of the current recessions and strengthen economic recessions and strengthen economic recovery …recovery …