Abstract
We empirically investigate the impact of financial crises and nominal exchange rate regime changes on growth dynamics. To that end, we estimate autoregressive models using panel data for 163 countries classified into four income groups during the period 1970–2011. Results suggest that financial crises significantly reduce short-run and long-run growth for high-income and lower-middle-income countries. In the case of the upper-middle-income countries, financial crises inflict a negative and statistically significant impact on short-run growth but only a marginally significant effect on long-run growth, while for lower-income countries they only have a short-run influence. As for the exchange rate regimes, we find that they only positively affect the short-run growth rate for lower-middle-income and low-income countries, not showing any significant impact on long-run growth rates.
Acknowledgements
The authors thank Ethan Ilzetzki for kindly providing us with the updated database on exchange rate arrangements. Responsibility for any remaining errors rests with the authors.
Notes
1 In order to save space, we do not report the list of countries under study. However, they are available from the authors upon request.
2 Income classifications are set each year on July 1. These official analytical classifications are fixed during the World Bank’s fiscal year (ending on June 30); thus, countries remain in the categories in which they are classified irrespective of any revisions to their per capita income data.
3 The Hausman test rejects the RE model in favour of the FE estimation. The joint significance of the fixed error component model is strongly confirmed, suggesting that FE is needed. Breusch and Pagan’s Lagrange multiplier test fails to reject the null that variances across entities are zero, concluding that RE is not appropriate.