Pick Your Poison: The Choices and Consequences of Policy Responses to Crises

Kristin Forbes and Michael Klein

No 20987, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Countries choose different strategies when responding to crises. An important challenge in assessing the impact of these policies is selection bias with respect to relatively time-invariant country characteristics, as well as time-varying values of outcome variables and other policy choices. This paper addresses this challenge by using propensity-score matching to estimate how major reserve sales, large currency depreciations, substantial changes in policy interest rates, and increased controls on capital outflows affect real GDP growth, unemployment, and inflation during two periods marked by crises, 1997 to 2001 and 2007 to 2011. We find that none of these policies yield significant improvements in growth, unemployment, and inflation. Instead, a large increase in interest rates and new capital controls are estimated to cause a significant decline in GDP growth. Sharp currency depreciations may raise GDP growth over time, but only with a lagged effect and after an initial contraction.

JEL-codes: F41 (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mfd and nep-opm
Note: IFM
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Citations: View citations in EconPapers (45)

Published as Kristin J Forbes & Michael W Klein, 2015. "Pick Your Poison: The Choices and Consequences of Policy Responses to Crises," IMF Economic Review, Palgrave Macmillan, vol. 63(1), pages 197-237, May.

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