Sectoral Economic Downturns and Costs of Financial Crises

Abstract

This paper studies the features of sectoral economic downturns in agriculture, industry and services sectors using an extensive database of 127 countries for the period 1970-2013. Our analysis shows that there are stark differences in the frequency and severity of economic downturns across sectors. In particular, economic downturns in agriculture are deeper than other sectors and their frequency is more than twice that of economy-wide downturns. They are also accompanied by larger losses in employment. Downturns in economic activity last longer in the industry sector. This study further investigates how economic downturns are related to financial crises. The negative effects associated with financial crises appear to die off quickly for agriculture and services sectors. For industry, the negative effects associated with banking crises persist in the following years. The empirical estimates suggest that a financial crisis is associated with losses up to 6 percent of sectoral value at the onset of the crisis, whereas the cumulative effects can add up to 18 percent.