Virtuous Financial Crises? Empirical Evidence on the Medium-Term Effects of Banking Crises on Productivity Growth

Abstract

This paper aims to shed light on the medium term effects of banking crises on productivity growth, bringing the 'creative destruction' hypothesis to the data. The analysis is done at both the macro and micro levels. At the macro level, I study the differences in mean productivity growth before and after a crisis using data on aggregate productivity for a sample of 77 systemic banking crises. I find that during the subsequent seven years after a crisis productivity grows, on average, faster than during the seven years before the crisis. At the micro level, I exploit the differences in external finance dependence across twenty one economic sectors and find that sectors that rely more on external finance exhibit, on average, comparatively faster productivity growth in the seven years following a crisis. Overall, the results indicate medium term faster productivity growth after crises, in line with the creative destruction hypothesis.