Recessions, Growth and Banking Crises

Abstract

We examine the relationship of banking crises with economic growth and recessions. Our data cover 21 economies from around the world, most from 1870 to 2009 with the rest starting in 1901 or earlier. The data include capital investment and human capital formation. We have two major findings. First, there is very large heterogeneity in growth of Gross Domestic Product (GDP) and capital investment after banking crises. Most strikingly, twenty-five percent of counties experience no decrease in real GDP per capita in the year of the crisis or the following two years. Some countries see an increase in long run growth after a crisis while others see a fall, with no clear overall pattern. Second, we find clear evidence consistent with Zarnowitz’s Law. If there is a contraction in economic activity after a banking crisis, larger decreases in real GDP per capita are followed by faster subsequent growth.