Recovery from a currency crisis: Some stylized facts

Abstract

Using a comprehensive data set of over 100 developing countries, this paper examines how economies recover from a currency crisis. Some of the regularities found are listed below. First, it takes less than 3 years for the GDP growth rate to fully recover its tranquil-period average. The level of GDP, however, remains permanently below its initial trend, suggesting that the shocks underlying a crisis are persistent. Second, the credit crunch problem lasts much longer than the reduction in the GDP growth rate. Third, the pre-crisis credit expansion and reserve inadequacy, which have been widely recognized as the main causes of a crisis, also are closely related to the extent of the post-crisis recession. Fourth, crisis episodes that are caused mainly by illiquidity, rather than by insolvency, tend to exhibit a sharp recovery. © 2004 Elsevier B.V. All rights reserved.