What explains different duration of the Great Recession across countries?
| Thesis title in Czech: | Co vysvětluje různé trvání velké recese napříč zeměmi? |
|---|---|
| Thesis title in English: | What explains different duration of the Great Recession across countries? |
| Key words: | Velká recese, Délka recese, Ekonomická odolnost, BMA, Bayes |
| English key words: | Great Recession, Crisis duration, Economic resilience, BMA, Bayes |
| Academic year of topic announcement: | 2017/2018 |
| Thesis type: | diploma thesis |
| Thesis language: | angličtina |
| Department: | Institute of Economic Studies (23-IES) |
| Supervisor: | PhDr. Jaromír Baxa, Ph.D. |
| Author: | hidden - assigned by the advisor |
| Date of registration: | 04.04.2018 |
| Date of assignment: | 04.04.2018 |
| Date and time of defence: | 15.09.2020 09:00 |
| Venue of defence: | Opletalova - Opletalova 26, O314, Opletalova - místn. č. 314 |
| Date of electronic submission: | 01.08.2020 |
| Date of proceeded defence: | 15.09.2020 |
| Opponents: | PhDr. Michal Hlaváček, Ph.D. |
| URKUND check: | |
| Guidelines |
| Motivation:
While the topic of Great Recession has already been widely discussed by the economists, according to my knowledge, no study concerning the differences in duration of the Great Recession across countries has been published. I am going to argue, that not only the severity of crises matters, but also the time it takes for the economy to recover from the shock is important, as prolonged crisis negatively affects the utility of people and their expectations, which are of such a large importance in modern macroeconomics. Consequently, it is vital to determine which policies were effective in shortening the duration of the last major crisis, the Great Recession, and which were ineffective. The limited research in the field of duration of financial crises is not conclusive. Craigwell et al. (2013) used a dataset of 55 developed and developing countries and found the effect of fiscal stimulus to be negative in relation to shortening duration of the financial crisis. On the other hand, Kannan et al. (2012) investigate the effect of both monetary and fiscal policy stimulus on 21 advanced economies. They conclude, that fiscal stimulus is particularly helpful during financial crises, while monetary easing is much less effective. Moreover, Bluhm et al. (2014) reveal that good institutions are capable of shortening the crisis. However, none of the aforementioned studies include the Great Recession in their dataset. My thesis will therefore attempz to contribute to the debate by answering e.g. following questions. How effective was fiscal and monetary policy in shortening the duration of the Great Recession? Were the pre-crisis fundamentals and other explanatory variables (such as employment, trade openness, undervaluation of currency, etc.) more important than the policies implemented during the recession? Hypotheses: 1. Hypothesis #1: Countercyclical fiscal policy proved to be more effective in shortening the duration of the Great Recession than monetary policy interventions. 2. Hypothesis #2: Pre-crisis fundamentals and other variables were significant determinants of length of the recession in given country. 3. Hypothesis #3: Countries with undervalued currency experienced faster recovery from the crisis. |
| References |
| CRAIGWELL, Roland, Troy LORDE and Winston MOORE. Fiscal policy and the duration of financial crises. Applied Economics. 2013
KANNAN, Prahash, Alasdair SCOTT and Marco E. TERRONES. From Recession to Recovery: How Soon and How Strong. 2012. BLUHM, Richard, Denis CROMBRUGGHE and Adam SZIRMAI. Do Weak Institutions Prolong Crises?: On the Identification, Characteristics, and Duration of Declines during Economic Slumps. 2014. RODRIK, Dani. The Real Exchange Rate and Economic Growth. Harvard University, 2008. GREGORIO, José. Resilience in Latin America: Lessons from Macroeconomic Management and Financial Policies. Universidad de Chile, 2012. CALDERA-SÁNCHEZ, Aida, Alain SERRES, Filippo GORI, Mikkel HERMANSEN and Oliver RÖHN. Strengthening Economic Resilience: Insights from the Post-1970 Record of Severe Recessions and Financial Crises. The OECD Economic Policy Paper Series, 2016. LI, Jie. The effectiveness of fiscal and monetary policy responses to twin crises. Applied Economics, 2013. DEB, Saubhik. Trade First and Trade Fast: A Duration Analysis of Recovery from Currency Crisis. 2005. |
| Preliminary scope of work |
| Methodology:
I will be estimating the relationship between multitude of country-specific variables and the duration of recession in given country using Bayesian model averaging method, which allows for high number of variables. Since there is no common definition of recovery of a country, I will be using two different definitions and estimating the relationships for both of them. The first is defined as the time it takes for the economy to return to the peak level before the recession. The second one is measured by cumulative growth achieved after a certain time period following the trough. My dataset will consist of data taken from the World Development Indicators published by the World Bank and from International Financial Statistics database published by the International Monetary Fund. Rodrik’s (2008) methodology will be used to calculate the explanatory variable of currency undervaluation. Expected Contribution: My thesis will contribute to not very deeply explored area of determinants of crisis duration. To my knowledge, it will be the first literature which will estimate the effect of both pre-crisis variables as well as policies implemented during the crisis on the duration of the Great Recession. The results of my thesis should be interesting in particular for politicians and central bankers. Outline: 1. Motivation 2. Introduction – Short summary of the Great Recession and its comparison with other recessions. Review of relevant literature concerning the duration of crises and resilience of countries, i.e. their ability to recover from negative shock. 3. Data and related work 4. Methodology – I will describe the Bayesean model averaging method and Rodrik’s (2008) methodology of calculating currency undervaluation, as well as my model and other relevat methodology. 5. Empirical results – Discussion of estimated results and robustness checks. 6. Conclusion – Summary of results as well as their implications for policy and possible future research. |
| Preliminary scope of work in English |
| Methodology:
I will be estimating the relationship between multitude of country-specific variables and the duration of recession in given country using Bayesian model averaging method, which allows for high number of variables. Since there is no common definition of recovery of a country, I will be using two different definitions and estimating the relationships for both of them. The first is defined as the time it takes for the economy to return to the peak level before the recession. The second one is measured by cumulative growth achieved after a certain time period following the trough. My dataset will consist of data taken from the World Development Indicators published by the World Bank and from International Financial Statistics database published by the International Monetary Fund. Rodrik’s (2008) methodology will be used to calculate the explanatory variable of currency undervaluation. Expected Contribution: My thesis will contribute to not very deeply explored area of determinants of crisis duration. To my knowledge, it will be the first literature which will estimate the effect of both pre-crisis variables as well as policies implemented during the crisis on the duration of the Great Recession. The results of my thesis should be interesting in particular for politicians and central bankers. Outline: 1. Motivation 2. Introduction – Short summary of the Great Recession and its comparison with other recessions. Review of relevant literature concerning the duration of crises and resilience of countries, i.e. their ability to recover from negative shock. 3. Data and related work 4. Methodology – I will describe the Bayesean model averaging method and Rodrik’s (2008) methodology of calculating currency undervaluation, as well as my model and other relevat methodology. 5. Empirical results – Discussion of estimated results and robustness checks. 6. Conclusion – Summary of results as well as their implications for policy and possible future research. |