Real output costs of financial crises: a loss distribution approach

Kapp, Daniel and Vega, Marco (2012): Real output costs of financial crises: a loss distribution approach.

Abstract

We study cross-country GDP losses due to financial crises in terms of frequency (number of loss events per period) and severity (loss per occurrence). We perform the Loss Distribution Approach (LDA) to estimate a multi-country aggregate GDP loss probability density function and the percentiles associated to extreme events due to financial crises.

We find that output losses arising from financial crises are strongly heterogeneous and that currency crises lead to smaller output losses than debt and banking crises. Extreme global financial crises episodes, occurring with a one percent probability every five years, lead to losses between 2.95% and 4.54% of world GDP.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial Crisis, Severity, Frequency, LDA
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance ; Insurance Companies ; Actuarial Studies; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General; G - Financial Economics > G0 - General > G01 - Financial Crises

References

AZIZ, J., CARAMAZZA, F. AND SALGADO, R. (2000), Currency Crises: In Search of Common Elements", IMF Working Papers 00/67, International Monetary Fund.

ANGKINAND, A. (2008), “Output Loss and Recovery from Banking and Currency Crises: Estimation Issues", mimeo.

BARRO, R. (2001), “Economic Growth in East Asia before and after the Financial Crises", NBER Working Paper 8330.

BARRO, R. (2006), “Rare Disasters and Asset Markets in the Twentieth Century", The Quarterly Journal of Economics 121(3), 823-866, doi:10.1162/qjec.121.3.823

BICABA, Z., KAPP, D., MOLTENI, F. (2011), “Stability periods between Financial crises: The role of macroeconomic fundamentals and crises management policies", CES Working Paper 2011.64

BORDO M., EICHENGREEN, B., KLINGEBIEL D., and Martinez-Peria, M. (2001), “Is the crisis problem growing more severe?," Economic Policy, 16(32), 51-82.

BORIO, C., N. KENNEDY and S. PROWSE. (1994). "Exploring aggregate asset price fluctuations across countries: measurement, determinants and monetary policy implications", BIS Economic Papers, 40, April.

BOYD, J., GOMIS, P., KWAK, S., AND SMITH, B. (2000), “A User's Guide to Banking Crises", mimeo.

BOYD, J., KWAK, S. AND SMITH, B. (2005), “The Real Output Losses Associated with Modern Banking Crises", Journal of Money, Credit and Banking, 37(6), pp 977-999.

CABALLERO, R. (2003), “The Future of the IMF", American Economic Review, 93(2), 31-38.

CALVO, G. (1998), “Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops", Journal of Applied Economics, Vol. 1, No. 1, p. 35-54, 1998.

CAPRIO, G. AND KLINGEBIEL, D. (1996), “Bank Insolvencies.Cross-country Experience", Working Paper, The World Bank, 1996.

CAPRIO, G. AND KLINGEBIEL, D. (1996), “Bank Insolvencies.Bad Lucky, Bad Policy, or Bad Banking?", Policy Research Working Paper 1620, The World Bank.

CECCHETTI, S., KHOLER, M., AND UPPER, C. (2009), “Financial Crises and Economic Activity", NBER Working Papers 15379.

CHERNOBAI, A., S. RACHEV AND F. FABOZZI. (2011), Operational Risk: A Guide to Basel II Capital Requirements, Models, and Analysis. Wiley Finance.

CHINN, M. AND FRIEDEN, J. (2011), “Lost Decades: The Making of American Debt Crisis and Recovery, W.W. Norton & Company, Inc.

CORDELLA, T., YEYATI, E.L. (2005), “A (New) Country Insurance Facility", Working Paper, IMF, WP/05/23.

CORDELLA, T., YEYATI, E.L. (2005), “Country Insurance", IMF Staff Paper, IMF, Vol.52, Special Issue.

CRUZ, M. (2004). Operational risk modelling and analysis: theory and practice, London: Risk Books.

DEMIRGUC-KUNT, A., AND DETRAGIACHE, E. (1998) “The Determinants of Banking Crises in Developing and Developed Countries", IMF Staff Papers, 45(1), pp. 81-109.

DEMIRGUC-KUNT, A. E. DETRAGIACHE AND GUPTA, P. (2006) “Inside the crisis: An empirical analysis of banking systems in distress", Journal of International Money and Finance, 25(5), 702-718. 25

FURCERI, D. AND ZDZIENICKA, A. (2011), “How Costly Are Debt Crises?" , IMF Working Papers WP/11/280, International Monetary Fund.

FRANKEL, J. AND A. ROSE. (1996), "Currency Crashes in Emerging Markets: An Empirical Treatment", Journal of International Economics 41, pp. 351-66.

FRYDL, E. (1999), “The Length and Cost of Banking Crises", IMF Working Papers 99/30, International Monetary Fund.

GORTON, G. (1988), "Banking Panics and Business Cycles", Oxford Economic Papers, 40 pp. 221-55.

GUPTA, P., MISHRA, D. AND SAHAY, R. (2007), “Behavior of output during currency crises", Journal of International Economics, 72(2007), 428-450, 2007.

HANNA, D. AND HUANG, Y. (2002), “Bank Restructuring in Post-Crisis Asia", Asian Economic Papers, 1(1), pp. 3-42.

HOGGARTH, G., REIS, R. AND SAPORTA, V. (2002), “Costs of banking system instability: some empirical evidence", Journal of Banking & Finance, 26(5), pages 825-855.

HUTCHINSON, M. AND K. MCDILL (1999), "Are All Banking Crises Alike? The Japanese Experience in International Comparison." Journal of the Japanese and International Economics, 13, pp. 155-180.

IMF (2009), Global Financial Stability Report. November 2009 update.

KAMINSKY, G. AND REINHART, C. (1999), “The Twin Crises: The Causes of Banking and Balance-of-Payments Problems", American Economic Review, American Economic Association, 89(3), pages 473-500. 26

KINDLEBERGER, C. (1978), Manias, Panics, and Crashes: A History of Financial Crises, Palgrave Macmillan.

LAEVEN, L.,AND VALENCIA, F. (2008), “Systemic Banking Crises: A New Database", Working Paper, IMF, 2008.

LINDGREN, C., GARCIA, G. AND SAAL, M. (1996), Bank Soundness and Macroeconomic Policy, Washington, D.C.: International Monetary Fund.

LOGAN, A. (2001), "The United Kingdoms small banks crisis of the early 1990s: what were the leading indicators of failure?", Bank of England Working Paper 139.

PANJER, H. (2006), Operational Risk: Modeling Analytics. Wiley, New York

REINHART, C. AND ROGOFF, K. (2009), This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.

SHEVCHENKO, P. (2011), Modelling Operational Risk using Bayesian Inference, Springer, Berlin. 27