December 27, 2016
Accounting for the Business Cycle Reduces the Estimated Losses from Systemic Banking Crises
We re-estimate the effects of systemic banking crises in industrialised countries reported by Cerra and Saxena with a model that includes transitory business cycle shocks. We use the correlation between countries' business cycles to identify temporary business cycle shocks, which helps prevent these transitory shocks being incorrectly explained by the crisis dummy.
Doing so results in estimated permanent losses from systemic banking crises of 4% rather than the 6% reported in the original article.