Determinants of the Duration of Economic Recoveries: The Role of ´Too Much Finance´

Vitor Castro and Boris Fisera

No 2022/33, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: This paper explores the effect of financial development on the duration of economic recoveries, considering a sample of 414 economic recoveries observed in 67 countries during the period 1989-2019. We define the duration of economic recovery, as the time it takes the economy to return to its potential output level. Using a continuous-time Weibull duration model, we find that a higher level of financial development tends to prolong the duration of economic recovery. Therefore, our findings indicate that a too highly developed financial system might delay a full recovery after a recession, supporting the notion that there is ´too much financeâ´. In particular, greater size of the underregulated sector of non-banking financial institutions (shadow banks) prolongs the economic recovery. Moreover, the emerging economies, with their generally poorer regulatory frameworks, are more negatively affected by ´too much finance´. Underlining the importance of an effective regulation of the entire financial system, our results also confirm that a higher regulatory quality limits the negative consequences of ´too much finance´.

Keywords: economic recovery; duration analysis; Weibull duration model; financial development; too-much-finance (search for similar items in EconPapers)
Pages: 47 pages
Date: 2022-12, Revised 2022-12
New Economics Papers: this item is included in nep-ban and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:fau:wpaper:wp2022_33

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