Chapter 3 From Recession to Recovery: How Soon and How Strong?
- International Monetary Fund. Research Dept.
- Published Date:
- April 2009
This chapter examines recessions and recoveries in advanced economies and the role of countercyclical macroeconomic policies. Are recessions and recoveries associated with financial crises different from others? What are the main features of globally synchronized recessions? Can countercylical policies help shorten recessions and strengthen recoveries? The results suggest that recessions associated with financial crises tend to be unusually severe and their recoveries typically slow. Similarly, globally synchronized recessions are often long and deep, and recoveries from these recessions are generally weak. Countercyclical monetary policy can help shorten recessions, but its effectiveness is limited in financial crises. By contrast, expansionary fiscal policy seems particularly effective in shortening recessions associated with financial crises and boosting recoveries. However, its effectiveness is a decreasing function of the level of public debt. These findings suggest the current recession is likely to be unusually long and severe and the recovery sluggish. However, strong countercyclical policy action, combined with the restoration of confidence in the financial sector, could help move the recovery forward.