Economic resilience: Why some countries recover more robustly than others from shocks

Abstract

Economic resilience – the tendency of economies to bounce back from negative shocks – has never been more important, given the growing prevalence and frequency of such shocks. The existing literature on its determinants are inconclusive. We therefore reanalyze those determinants for a large sample of countries, first collectively and then separately for advanced countries and emerging markets. Deeper recessions are followed by stronger recoveries, consistent with Friedman's plucking model of the business cycle. In contrast, longer recessions are associated with weaker recoveries, as if more extensive destruction of human capital and other hysteresis effects limit resilience. Trade openness and exchange rate flexibility, which facilitate the substitution of external demand when domestic demand is weak, are positively associated with resilience, as are a strong current account balance and ample foreign reserves. Financial openness and rapid private credit growth in the preceding expansion contribute negatively, reflecting their legacy of financial problems.