This edition of the World Economic Outlook explores how a dramatic escalation of the financial crisis in September 2008 provoked an unprecedented contraction of activity and trade, despite active policy responses. It presents economic projections for 2009 and 2010, and also looks beyond the current crisis, considering factors that will shape the landscape of the global economy over the medium term, as businesses and households seek to repair the damage. The analysis also outlines the difficult policy challenges presented by the overwhelming imperative to take all steps necessary to restore financial stability and revive the global economy, and the longer-run need for national actions to be mutually supporting. The first of two analytical chapters, "What Kind of Economic Recovery?" explores the shape of the eventual recovery. The second, "The Transmission of Financial Stress from Advanced to Emerging and Developing Economies," focuses on the role of external financial linkages and financial stress in transmitting economic shocks.
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.
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