Claessens 2009

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SUMMARY
an We provide a comprehensive empirical characterization of the linkages between

key macroeconomic and financial variables around business and financial cycles,
for 21 OECD countries over the period 1960–2007. In particular, we ana-
lyse the implications of 122 recessions, 113 (28) credit contraction (crunch)
episodes, 114 (28) episodes of house price declines (busts), 245 (61) episodes
of equity price declines (busts), and their various overlaps in these countries,
over the sample period. Our results indicate that the interactions between macro-
economic and financial variables can play a major role in determining the sever-
ity and duration of a recession. Specifically, we find evidence that recessions
associated with credit crunches and house price busts tend to be deeper and
longer than other recessions.
— Stijn Claessens, M. Ayhan Kose and Marco E. Terrones
Economic Policy October 2009 Printed in Great Britain

CEPR, CES, MSH, 2009.
CRUNCHES AND BUSTS 655
What happens during

recessions, crunches and
busts?
Stijn Claessens, M. Ayhan Kose and Marco E. Terrones

International Monetary Fund
‘… recessions that follow swings in asset prices are not necessarily longer, deeper, and associ-
ated with a greater fall in output and investment than other recessions…’ (Roger W. Fergu-
son, Vice Chairman of the Federal Reserve Board, January 2005)
‘The massive downturn in the US economy will last longer and be more damaging than previous
recessions because it is driven by an unprecedented loss of household wealth.’ (Martin Feld-
stein, Member of the NBER Business Cycle Dating Committee, February 2009)
1. INTRODUCTION
The financial crisis that started in the United States in 2007 has spread quickly to
a number of advanced and emerging countries and transformed into the most
severe global financial crisis since the Great Depression. The crisis has been
We would like to thank Tullio Jappelli and two anonymous referees for detailed comments which significantly improved the
paper. We are grateful for helpful suggestions from Lewis Alexander, Michael Dooley, Kristin Forbes, Prakash Loungani,
David Romer and our discussants, Frank Diebold, Vitor Gaspar, Steven Kamin, Desmond Lachman, Gianmarco Ottaviano,
Vincent Reinhart, Ken Singleton, and Angel Ubide, members of the Economic Policy Panel in Brussels and participants in
various seminars and conferences where earlier versions of this paper were presented. Dio Kaltis, David Low, Yongjoon Shin
and Zhi (George) Yu provided excellent research assistance. The views expressed in this paper are those of the authors and
do not necessarily represent those of the IMF or IMF policy.
The Managing Editor in charge of this paper was Tullio Jappelli.
Economic Policy October 2009 pp. 653–700 Printed in Great Britain

CEPR, CES, MSH, 2009.
656 STIJN CLAESSENS, M. AYHAN KOSE AND MARCO E. TERRONES
accompanied by an intense debate over its impact on the broader economy. The
spillovers to the real economy have been severe, with almost all advanced econo-
mies in recession for several quarters and the global economy suffering its worst
decline in output since World War II.
These developments have highlighted a number of questions about the linkages
between the real economy and the financial sector during recessions. Two questions
often raised in this context are: How do macroeconomic and financial variables
behave around recessions, credit crunches and asset (house and equity) price busts?
And, are recessions associated with credit crunches and asset price busts different
than other recessions? These two questions are pertinent to the current recession,
since the episodes following the crisis coincide with credit crunches, and house and
equity price busts in many countries. In order to address these questions, we pro-
vide a comprehensive empirical characterization of the linkages between key
macroeconomic and financial variables around business and financial cycles for 21
OECD countries over the 1960–2007 period.
We identify turning points in these variables using standard business cycle dating
methods. We document 122 recessions, 113 credit contractions, 114 house price
declines, and 245 equity price declines for these countries over the sample period.
When recessions, credit contractions, house price and equity price declines fall into the
top quartiles of all recessions, contractions and declines, we define them as severe reces-
sions, credit crunches and house price and equity price busts. First, we analyse the char-
acteristics of these events – in terms of duration and severity – and the behaviour of
major macroeconomic and financial variables around the events. Next, we document
the coincidence of recessions and credit crunches or asset price busts, and analyse the
implications of recessions associated with crunches and busts. We conduct a formal
analysis of the special roles played by financial market conditions in affecting the depth
of a recession.
Our study contributes to the large body of research analysing the roles played by
financial variables in explaining fluctuations in economic activity. Financial and
macroeconomic variables interact closely, through wealth and substitution effects,
and through their impacts on firms’ and households’ balance sheets (e.g. Blanchard
and Fischer, 1989; Obstfeld and Rogoff, 1999). In particular, asset prices can influ-
ence consumption through their effect on household wealth, and can affect invest-
ment by altering a firm’s net worth and the market value of the capital stock
relative to its replacement value. Perhaps more importantly, the interactions
between the financial sector and the real economy can be amplified by the financial
accelerator and related mechanisms. According to these mechanisms, an increase
(decrease) in asset prices improves a firm’s (or household’s) net worth, enhancing
(reducing) its capacities to borrow, invest and spend. This process, in turn, can lead
to further increases (decreases) in asset prices and can have general equilibrium
effects. Seminal models with these dynamics include Bernanke and Gertler (1989)
and Kiyotaki and Moore (1997).
Several empirical – both macro- and microeconomic – studies provide evidence

of these effects. There is a large empirical literature analysing the dynamics of busi-
ness cycles, asset price fluctuations and credit cycles (Bernanke and Gertler, 1989;
Borio et al., 2001), including studies based on micro data (banks or corporations)
(Bernanke et al., 1996; Kashyap and Stein, 2000). However, this literature focuses
mainly on the general procyclicality of financial and macroeconomic variables, and
less on how interactions between financial and real economic variables vary during
recessions, which is the focus of our paper.
We contribute also to a branch of the literature on business cycles which aims to
identify the turning points in macroeconomic and financial variables using various
methodologies. The classical methodology of dating business cycles applied here
dates back to Burns and Mitchell (1946). It has been used widely over the years
(Harding and Pagan, 2006) to study recessions, but only a few studies have con-
ducted cross-country analyses of cycles in asset prices identified by this method.1
Thus, although the roles played by financial variables in business cycles have
received much attention, most studies consider the topics of business cycle, credit
and asset prices independently (or in isolation). Furthermore, the links between real
and financial variables during recessions have yet to be analysed using a compre-
hensive dataset of a large number of countries over a long period. Apart from anal-
yses limited to a small number of cases and some other ‘case-type’ studies of
individual episodes, and a group of studies that focuses specifically on the behaviour
of real and financial variables surrounding financial crises, notably Reinhart and
Rogoff (2008, 2009), to the best of our knowledge, there is no comprehensive
empirical analysis of these links.2
Our paper thus fills three gaps in the literature. First, we learn about the implications
of episodes of recessions, credit crunches, and house and equity price busts based on a
sizeable set of macroeconomic and financial variables for a large number of countries
over a long period of time. Second, our study is the first detailed, cross-country empiri-
cal analysis addressing the implications of a recession coinciding with certain types of
financial market difficulties. Third, it provides the first set of empirical evidence suggest-
ing that changes in house prices are closely associated with the costs of recessions.
The paper is structured as follows. Section 2 presents our data and methodology.
Section 3 examines the basic characteristics of recessions and credit contraction
(and crunch) episodes, and asset price declines (and busts). Section 4 studies the
implications of recessions associated with crunches and asset price busts and, in
Section 5, we provide a brief discussion of the changes in policy variables during
various episodes of recession, crunch and bust. Section 6 presents a more formal
1
Exceptions are Helbling and Terrones (2003), which examines the implications of asset price booms and busts for a large
set of industrial countries, and Borio and McGuire (2004) and Pagan and Sossounov (2003).
2
Ferguson (2005), writing in the aftermath of the collapse of the internet bubble, considers three episodes of rapid asset price
increases and credit expansions, followed by subsequent recessions: the United Kingdom in 1974, Japan in 1992, and the
United States in 2001.
analysis of the roles played by financial factors in determining the cost of recessions,
using some simple regression models. Section 7 concludes.
2. DATA AND METHODOLOGY
2.1. Data
We constructed a comprehensive database of macroeconomic and financial vari-

ables for 21 OECD countries over the period 1960:1–2007:4, based on IMF Inter-
national Financial Statistics (IFS) and OECD Analytical Databases.3 Our analysis
focuses on the following macroeconomic variables: output, consumption, investment
(of which separate residential and non-residential investment), industrial production,
exports, imports, net exports, current account balance, and rates of unemployment
and inflation. The quarterly time series of macroeconomic variables are seasonally
adjusted, whenever necessary, and are in constant prices.
The financial variables we consider are credit, house prices, and equity prices.
Credit series are from the IFS, Datastream and Haver and defined as claims on the
private sector by deposit money banks.4 These series were used in earlier cross-
country studies on credit dynamics (Mendoza and Terrones, 2008).5 The main
sources for house prices are the OECD and the Bank for International Settlements
(BIS).6 Equity price indices are from the IFS. All financial variables are converted
into real terms using their respective consumer price indexes (CPI).
The ‘policy’ variables we focus on are (real) government consumption as a proxy
for fiscal policy, and short-term interest rates as a proxy for monetary policy. The
data on government consumption are from the OECD Analytical Database, and
short-term interest rates are from the IFS. We consider both nominal and real
3
The countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan,
Netherlands, New Zealand, Norway, Portugal, Spain, Switzerland, Sweden, the United Kingdom, and the United States.
4
Information on the composition of credit by both borrower type (i.e. business and household) and maturity (i.e. short-term
consumer lending vs. mortgage lending) would greatly enrich the analysis. Unfortunately, such disaggregated credit series are
not available for a large number of countries over our sample period. Similarly, while the extent of credit market problems
can be measured using various interest rates, spreads, surveys of senior lending officers, and the various financial conditions
indices produced by private and public institutions, these measures are not available for most of the countries studied over
our long sample period. For a smaller set of countries, Duygan-Bump and Grant (2009) provide an analysis of the dynamics
of household debt using the European Community Household Panel.
5
Some recent papers examine the behaviour of aggregate credit measures during the ongoing crisis in the US (see Chari
et al., 2008; Cohen-Cole et al., 2008). These studies show that it is important to go beyond aggregate measures. However, this
is extremely difficult, if not impossible, in the context of our large cross-country coverage.
6
The BIS, our main data source for the house price series, puts considerable effort into producing these data which, typi-
cally, are obtained from national authorities and are comparable across countries. The series reflect nationwide trends in the
majority of cases, but for some countries are based on price trends in the largest cities. The house price data we have are not
of the Case-Shiller type (i.e. corrected for quality and repeated sales) since such series simply do not exist for most of the
countries in our sample. Also, more importantly, there are drawbacks to Case-Shiller type data as they cover a smaller set of
housing wealth while giving larger weight to distressed sales such as subprime sales, and to jumbo sales in a narrow set of
states (see Calomiris, 2008). The house price series we employ were used in a number of earlier cross-country studies (e.g.
Terrones, 2004; Cardarelli et al., 2008; Organization for Economic Cooperation and Development, 2005).
(deflated using the (ex-post) CPI series) short-term rates. Details on the sources and
definitions of all our variables are contained in the Appendix.
2.2. Methodology
Much research has been devoted to the definition and measurement of business
cycles, and various approaches have been proposed (Harding and Pagan, 2006).
Our study is based on the ‘classical’ definition of a business cycle – mainly because
of its simplicity, but also because it constitutes the guiding principle of the National
Bureau of Economic Research (NBER) in determining the turning points of US
business cycles. This definition goes back to the pioneering work of Burns and
Mitchell (1946) who laid the methodological foundation for the analysis of business
cycles in the US (see further Claessens et al., 2008).
They define a cycle as ‘consist[ing] of expansions occurring at about the same
time in many economic activities, followed by similar general recessions, contrac-
tions, and revivals which merge into the expansion phase of the next cycle; this
sequence of changes is recurrent but not periodic; in duration, business cycles vary
from more than one year to ten or twelve years.’ Following the spirit of their char-
acterization of a business cycle, the NBER (2001) defines a recession as ‘a signifi-
cant decline in activity spread across the economy, lasting more than a few months,
visible in industrial production, employment, real income, and wholesale-retail
trade.’ A recession begins just after the economy reaches a peak of activity and
ends as the economy reaches its trough.’7
The classical methodology focuses on changes in levels of economic activity. An
alternative methodology would be to consider how economic activity fluctuates
around a trend, and then to identify a ‘growth cycle’ as a deviation from this trend
(Stock and Watson, 1999). The classical methodology, however, is more useful for our
purpose since we are interested in business cycles in OECD countries where growth
rates have been relatively low. This implies that growth recessions can be small in size
and frequent, while level recessions are more pronounced, but less frequent (Morsink,
Helbling and Tokarick, 2002). The classical methodology also provides for a well-
defined set of cycles, rather than having to consider how they depend on the specific
detrending method used.8 The turning points identified by using the classical method-
ology are robust to the inclusion of newly available data: in other methodologies new
data can affect the estimated trend and thus the identification of a growth cycle.
7
Our approach parallels that of the CEPR whose definition of a recession for determining the chronology of the euro area
business cycle is similar to that of the NBER. However, there are some differences; e.g. unlike the NBER, which focuses on
monthly data, the CEPR dates episodes in quarters. Moreover, in addition to aggregate euro area statistics, the CEPR also
examines individual country statistics to assess whether expansions or recessions are widespread.
8
Alternative methodologies for analysing the features of business cycles are relevant if the particular interest is in studying
cyclical deviations from a trend, i.e. growth cycles. However, in that case, the results depend very much on the choice of the
detrending methodology (see Canova, 1998). Several studies document the features of business fluctuations using the method-
ology of growth cycles (see Backus et al., 1995).
We employ the algorithm introduced by Harding and Pagan (2002a), which

extends the so-called BB algorithm developed by Bry and Boschan (1971), to
identify the turning points in the log-level of a series.9 We search for maxima and
minima over a given period of time. Then, we select pairs of adjacent, locally abso-
lute maxima and minima that meet certain censoring rules, requiring a certain mini-
mal duration for cycles and phases. In particular, the algorithm requires the
durations of a complete cycle, and of each phase to be at least five quarters and two
quarters, respectively. Specifically, a peak in a quarterly series yt occurs at time t if:
f½ðyt yt2 Þ > 0; ðyt yt1 Þ > 0 and ½ðytþ2 yt Þ < 0; ðytþ1 yt Þ < 0g:
Similarly, a cyclical trough occurs at time t if:
f½ðyt yt2 Þ < 0; ðyt yt1 Þ < 0 and ½ðytþ2 yt Þ > 0; ðytþ1 yt Þ > 0g:
We can then define a complete cycle from one peak to the next with two phases,
the contraction phase (from peak to trough) and the expansion phase (from trough
to peak). We use the same approach to determine output and in the financial series
cycles.10 Our main macroeconomic variable is output (GDP) which provides the
broadest measure of economic activity. We also look at cycles in other macro-
economic variables, including consumption and investment. In terms of financial
variables, we consider cycles in credit, house prices and equity prices.
The main characteristics of cyclical phases are their duration and amplitude. Since
we are mainly interested in examining contractions, we define these characteristics for
contractions only. The duration of a contraction, Dc, is the number of quarters, k,
between a peak and the next trough. The amplitude of a contraction, Ac, measures
the change in yt from a peak ( y0) to the next trough ( yk), i.e. Ac = yk – y0. For output,
we consider another widely used measure, cumulative loss, which combines informa-
tion on duration and amplitude to proxy for the overall cost of a contraction. The
cumulative loss, Fc, during a contraction, with duration k, is defined as:
X
k
Ac
Fc ¼ ðyj y0 Þ :
j¼1
2
We further classify recessions based on the extent of decline in output. In partic-

ular, we call recessions mild or severe if the peak-to-trough output drop falls within
the bottom or top quartile respectively of all output drops. Similarly, a credit
crunch is defined as a peak-to-trough contraction in credit which falls within the
9
The algorithm we employ is known as the BBQ algorithm since it is applied to quarterly data. It is possible to use a differ-
ent algorithm, such as a Markov Switching (MS) model (Hamilton, 2003). Harding and Pagan (2002b) compare the MS and
BBQ algorithm and conclude that the BBQ is preferable because the MS model depends on the validity of the underlying
statistical framework. Artis et al. (1997) and Harding and Pagan (2002a) also use the BBQ methodology.
10
In the case of asset prices, the constraint that the contraction phase must last at least two quarters is ignored if the quar-
terly decline exceeds 20%. Since asset prices can show much greater intra-quarter variation, making for large differences
between peaks and troughs for end-of-quarter data than when using higher frequency data.
top quartile of all credit contractions.11 Likewise, an equity (or house) price bust is
defined as a peak-to-trough decline which falls within the top quartile of all price
declines. We identify 122 output recessions (30 of which are severe), 113 credit con-
tractions (28 crunches), 114 declines (28 busts) in house prices, and 245 declines (61
busts) in equity prices.
We apply a simple ‘dating’ rule for whether or not a specific recession is associ-
ated with a credit crunch or an asset price bust. If a recession episode starts at the
same time as or after the start of an ongoing credit crunch or asset price bust, then
we consider the recession to be associated with the respective crunch or bust. By
definition, this rule describes a ‘timing’ association (or coincidence) between the two
events, but does not imply a causal link.
Among the events we analyse, there is considerable overlap: 21, 33 and 47 reces-
sion episodes are associated with credit crunches, house price busts and equity price
busts respectively (Figure 1).12 In other words, in about one in six recessions, there
is also a credit crunch underway, and in about one in four recessions, a house price
bust is underway. Equity price busts overlap about one-third of the recession
episode.
Recessions
Credit crunches
41
14
2 1
4
18
9 33
House Equity
price busts price busts
Figure 1. Associations between recessions, crunches and busts (number of

events in each event category)
Notes: The rectangle shows the distribution of 122 recession episodes in the sample into those associated with
crunches and busts (81) and those associated with none (41). Of 122 recessions, 21 are associated with credit
crunches, 33 with house price busts, and 47 with equity price busts. 41 recessions are associated with neither
a crunch nor a bust episode.
11
We rely on changes in the volume of (real) credit to identify episodes of credit crunch. Crunches are often defined as an
excessive decline in the supply of credit that cannot be explained by cyclical changes in demand (see Bernanke and Lown,
1991). It is difficult, however, to separate the roles played by demand and supply factors in credit. An alternative methodo-
logy to identify credit crunch episodes would be to consider prices measures, i.e. track changes in interest rates over time.
However, data limitations do not allow us to employ such measures.
12
Although we have only 28 episodes of housing busts, there are 34 recessions associated with housing busts. This is because
housing busts last much longer than do recessions, and some housing busts are associated with multiple recessions (6 busts
with 2, and 2 busts with 3 recessions each).
Our algorithm replicates the dates of US business cycles as determined by the

NBER. According to the NBER, the US experienced seven recessions over the
1960–2007 period. Our algorithm provides exact matches for four out of these
seven peak and trough dates and is only a quarter early in dating the remaining
peaks and troughs.13 The main features of our business cycles are quite similar as
well. The average duration of US business cycles based on our turning points is the
same as that reported by the NBER. In addition, the average peak-to-trough
decline in output during US recessions is about –1.7% based on our dates and
–1.4% based on NBER dates.
3. RECESSIONS, CREDIT CONTRACTIONS AND ASSET PRICE DECLINES
3.1. Basic features of a recession: duration and cost
Table 1 presents the main characteristics of the recessions in the countries in our
sample. Throughout this paper, we most often focus on medians because they are
less affected by the presence of outliers in our sample. Wherever relevant, however,
we refer also to averages. A typical OECD country experienced about five recessions
over the 1960–2007 period. There is no apparent pattern to the number of reces-
sions across countries, although some countries stand out. For example, Canada,
Ireland, Japan, Norway and Sweden experienced only three recessions during this
period, while Italy and Switzerland suffered nine, and New Zealand twelve, the high-
est number.14 A typical recession lasts about four quarters (one year) with the short-
est recession (by definition) two quarters and the longest thirteen quarters. Roughly
one-third of all recessions are short with only two quarters. The proportion of time
spent in recession, defined as the fraction of quarters the economy is in recession
over the full sample period with only completed cycles, is typically about 20%.
The median (average) decline in output from peak to trough, the recession’s
amplitude, is about 1.9% (2.6%). It ranges from about 1% for the typical recession
in Austria, Belgium, Ireland and Spain to around 6% for recessions in Greece and
New Zealand. The cumulative loss for a typical (median) recession is about 3%,
but the average loss is about 6.4% since the distribution is skewed to the right (on
average, there is a positive correlation (0.34) between duration and amplitude). This
also shows that overall loss can differ quite widely from amplitude since durations
vary. Country examples illustrate this difference further. For example, while the
13
These differences stem from the fact that the NBER uses monthly data for various activity indicators (including industrial
production, employment, personal income net of transfer payments, and volume of sales from the manufacturing and whole-
sale retail sectors), whereas we use only quarterly output series to identify cyclical turning points.
14
New Zealand experiences many recessions primarily because due to its highly volatile output and large exposure to terms-
of-trade shocks. Consistent with this, for New Zealand, the number of recessions in other variables, including consumption,
investment and industrial production, is also quite high. The business cycles we report for New Zealand are largely consistent
with those reported in Morsink et al. (2002) which documents seven recessions over the 1973–2000 period. Hall and McDer-
mott (2006), using unpublished output data, identify nine recessions during the 1946:1-2005:4 period.
Table 1. Recessions: summary statistics
Country All recessions Severe recessions
Number of Duration Proportion of time Amplitude Cumulative Number of Duration Amplitude Cumulative
recessions in recession loss severe recessions loss
CRUNCHES AND BUSTS
G-7
Canada 3 4.00 0.27 )2.84 )6.45 2 5.00 )4.13 )9.50
France 4 3.50 0.12 )1.27 )2.57 – – – –
Germany 8 3.25 0.17 )1.41 )2.56 1 4.00 )3.37 )4.90
Italy 9 3.11 0.17 )1.34 )2.67 1 3.00 )3.84 )7.94
Japan 3 4.67 0.40 )2.38 )7.39 1 8.00 )3.35 )15.38
United Kingdom 5 4.20 0.17 )3.11 )8.44 2 5.00 )4.77 )13.42
United States 7 3.43 0.14 )1.67 )3.16 – – – –
Other
Australia 7 3.43 0.20 )1.65 )3.50 1 7.00 )3.89 )12.70
Austria 6 2.50 0.14 )1.08 )1.60 – – – –
Belgium 7 2.86 0.18 )1.00 )1.53 – – – –
Denmark 7 4.14 0.16 )1.76 )4.11 1 7.00 )3.17 )9.58
Finland 5 4.60 0.21 )3.93 )22.51 1 13.00 )12.75 )102.76
Greece 8 3.50 0.21 )6.45 )11.83 6 3.67 )7.87 )14.63
Ireland 3 2.67 0.11 )0.90 )1.41 – – – –
Netherlands 5 4.00 0.51 )2.20 )0.82 2 2.50 )3.37 )4.32
New Zealand 12 3.83 0.32 )5.94 )14.74 9 3.11 )7.31 )12.04
Norway 3 2.67 0.09 )1.99 )2.99 – – – –
Portugal 4 4.50 0.16 )3.38 )6.68 1 5.00 )6.03 )12.19
Spain 4 3.00 0.16 )1.12 )2.76 – – – –
Sweden 3 7.33 0.33 )3.87 )15.17 1 12.00 )5.64 )24.23
Switzerland 9 3.56 0.22 )2.28 )6.86 1 7.00 )9.81 )42.81
Continued
663
664
Table 1. Continued
Country All recessions Severe recessions
Number of Duration Proportion of time Amplitude Cumulative Number of Duration Amplitude Cumulative
recessions in recession loss severe recessions loss
Country Group
OECD
Median 5.00 3.00 0.18 )1.87 )3.04 1.00 4.00 )4.89 )9.94
Mean 5.81 3.64 0.21 )2.63 )6.40 2.14 4.70 )6.31 )16.10
Eurozone
Median 5.00 3.00 0.17 )1.45 )2.34 1.00 3.50 )5.36 )8.57
Mean 5.73 3.37 0.20 )2.30 )5.21 2.00 4.33 )6.67 )18.68
G-7
Median 5.00 3.00 0.17 )1.59 )2.99 1.00 4.00 )3.46 )7.94
Mean 5.57 3.56 0.19 )1.83 )4.12 1.40 5.00 )4.05 )10.58
Non G-7
Median 5.50 3.00 0.21 )2.01 )3.08 1.00 4.00 )6.03 )10.29
Mean 5.93 3.67 0.22 )3.01 )7.47 2.56 4.61 )7.00 )17.79
Notes: Duration is the number of quarters between a peak and the next trough of a recession. Proportion of time in recession refers to the ratio of the number of quarters in
which the economy is in recession over the full sample period with only completed cycles. Amplitude is the percentage change in output from a peak to the next trough of
a recession. Cumulative loss combines information on duration and amplitude to measure the overall cost of a recession and is expressed in percentages. Severe recessions
are those in which the peak-to-trough decline in output is in the top 25% of all recession-related output declines. Country-specific data are means. Country-group data are
means/medians.
STIJN CLAESSENS, M. AYHAN KOSE AND MARCO E. TERRONES
median amplitude of recessions in Finland and Sweden is smaller than for those in
Greece and New Zealand, recessions in Finland and Sweden have very large cumu-
lative output losses (23% and 15%, respectively) since their recessions are of longer
duration.
A recession is classified as severe when the peak-to-trough decline in output is
below –3.15%. While many OECD countries, including Austria, Belgium, France,
Ireland, Norway, Spain, and the US, did not experience severe recessions in the
sample period, most recessions in Greece and New Zealand fall into this category.
The 30 such recessions typically last for five quarters, a quarter longer than the
average recession. By construction, therefore, they are much more costly than other
recessions with a median decline of about 5%, and a cumulative loss of about 10%,
almost three and five times, respectively, that of other recessions.
An extremely severe recession, in which the peak-to-trough decline in output
exceeds 10%, is usually called a depression: there are five in our sample – New
Zealand (1966:4–1967:2, 1974:3–1975:2, 1976:4–1978:1); Greece (1973:4–1974:3);
and Finland (1990:1–1993:2). While the depression in Finland was the longest with
a duration of 13 quarters and an output decline of 13%, the deepest depression
occurred in New Zealand in the 1976:4–1978:1 period, and led to a roughly 15%
reduction in output. The depression episodes coincide with sharp declines in con-
sumption and investment and substantial erosion of housing and equity values.
How do the ongoing recessions compare to past depression episodes, and espe-
cially the Great Depression? The recessions in the advanced countries triggered by
the ongoing financial crisis appear, so far, to be milder than the depression episodes
in our sample. Although the US recession that started in late 2007 is obviously
severe, its output cost so far has been much less than in past depressions, including
the Great Depression (when the US economy contracted by around 30% over a
4-year period). In general, the amplitudes and cumulative losses in severe recessions
in the G-7 countries are typically smaller than those in the other countries in our
sample.15
As shown in Figure 2, most recessions lasted four quarters or less, and most of
these were mild to moderate in depth, i.e. less than a 3.2% output decline.16 Of
the severe recessions, 40% lasted more than four quarters. There is also a pattern
of recessions becoming shorter and less severe over time, especially after the mid-
1980s. In particular, amplitude reduced from 2.6% in 1973–85 to 1.4% in
1986–2007. These patterns are in line with documented declining trends in output
volatility in the industrial countries, the so called ‘Great Moderation’ phenomenon
(see Kose et al., 2003a and 2008b).
15
There are some other differences in the main features of recessions across the country groups we examined, but they are
minor. For the country groupings we analyse, we report unweighted means and medians. These statistics would be lower,
i.e. less severe, for the eurozone if we reported means and medians weighted by country size.
16
Specifically, about 35% of all recessions last 2 quarters, 40% last 3–4 quarters, and 25% last 5 quarters or more.
Duration and Amplitude: Full Period (1960:1-2007:4)

50 (a)
Severe
40 Moderate
Mild
30
20
10
0
Short (2 quarters) Medium (3-4 quarters) Long(5+ quarters)
Duration: Sub-periods
50 (b)
1986-07
1973-85
40
1960-72
30
20
10
0
Short (2 quarters) Medium (3-4 quarters) Long (5+ quarters)
Amplitude: Sub-periods
60 (c)
1986-07
50 1973-85
1960-72
40
30
20
10
0
Mild (0-0.8%) Moderate (0.8-3.2%) Severe (>3.2%)
Figure 2. Recessions: duration and amplitude (share of total sample, percent)

Notes: Share of total number of recessions falling in particular categories. Duration is the number of quarters
from a peak to the next trough of a recession. Amplitude is the percentage change in output from a peak to
the next trough of a recession.
3.2. Changes in macroeconomic and financial variables during recessions
We examine next how the main macroeconomic and financial variables typically
vary during a recession. Table 2 presents peak-to-trough changes in these variables
for all, severe, and non-severe (other) recessions. We find the expected patterns,
with most macroeconomic variables exhibiting procyclical behaviour. Not surpris-
ingly, there are often significant differences between severe and non-severe reces-
sions in terms of duration, amplitude and cumulative output loss. In a severe
Table 2. Recessions: summary statistics (percentage change unless otherwise indicated)
Median values Mean values
All recessions Severe recessions Other recessions All recessions Severe recessions Other recessions
A. Output
Durationa 3.00 4.00*** 3.00 3.64 4.7** 3.29
CRUNCHES AND BUSTS
Amplitude )1.87 –4.89*** )1.33 )2.63 )6.31*** )1.43

Cumulative loss )3.04 )9.94*** )2.05 )6.40 )16.10*** )3.23
B. Components of output
Consumption )0.07 )1.19* 0.05 )0.16 )1.21* 0.18
Total investment )4.15 )9.73** )3.65 )5.93 )11.35** )4.19
Residential investment )4.08 )12.6*** )2.56 )6.64 )15.52*** )3.78
Non-residential investment )3.63 )7.38* )3.19 )5.10 )9.11* )3.78
Exports )0.65 –4.11*** 0.50 )0.74 )6.33*** 1.08
Imports )3.82 )9.18*** )2.58 )4.20 )9.41** )2.50
Net export (% of GDP)b 0.62 1.61 0.48 0.76 0.79 0.75
Current account (% of GDP)b 0.47 0.98 0.45 0.56 0.70 0.51
C. Other macroeconomic variables
Industrial production )4.14 )7.01*** )2.89 )3.99 )7.35*** )3.07
Unemployment rateb 0.61 1.36*** 0.51 1.16 2.56** 0.83
Inflation rateb )0.29 0.01 )0.31 )0.27 )0.13 )0.32
D. Financial variables
House prices )2.31 )4.53 )2.00 )3.57 )7.15* )2.49
Equity prices )5.93 )14.42*** )3.67 )4.43 )13.76** )2.01
Credit 0.75 0.83 0.75 1.07 0.82 1.15
Notes: Severe recessions are those in which the peak-to-trough decline in output is in the top 25% of all recession-related output declines. Other recessions refer to episodes
that are not severe recessions. In each cell, the mean (median) change in the respective variable from peak to trough of recessions is reported, unless otherwise indicated.
The symbols *, **, and *** indicate that the difference between means (medians) of severe recessions and other recessions is significant at the 10%, 5%, and 1% levels,
respectively.
a
Number of quarters.
b
Change in levels.
667
recession, consumption typically drops by more than 1%, compared to almost no

change in other recessions. The importance of investment for explaining the busi-
ness cycle has been stressed in the literature. Indeed, the declines in both residential
and total investment tend to be in double digits in severe recessions, compared to
about 4% in other recessions.
Recessions often overlap with declines in international trade. Exports drop more
(and significantly more) in severe recessions compared to other recessions. As
expected, imports fall, by six times more than exports in a typical recession and by
close to 10% in a severe recession (significantly more than in other recessions).
While both net exports and current account balance improve during recessions,
these changes are not significantly different across recession types.
The fall in industrial production tracks the drop in investment closely in all types of
recessions and is larger than fall in output. In 90% of recessions, there is an increase
in the unemployment rate, with the rise typically three times greater in severe than in
other recessions. As would be expected, inflation typically drops slightly (in 60% of
recessions), since aggregate demand is down. Inflation does not vary between different
types of recessions, possibly because some severe recessions are of the stagflation type
– recession combined with an acceleration in the rate of inflation.
Although credit typically continues to grow, it does so by less than 1%, with espe-
cially low growth rates in the initial stages of recessions. Credit growth does not vary
much between severe and other recessions. Both house and equity prices typically
decline in recessions, with larger declines in house prices in severe than in other reces-
sions. Reflecting the more volatile nature of equity prices, the decline in equity prices
is more than twice that of house prices. Credit declines in about 35% of recessions,
house prices in about 55%, and equity prices in about 60% of all cases.
3.3. Dynamics of recessions
We next examine how various macroeconomic, trade and financial variables behave
around recessions (Figure 3). We focus on patterns in year-on-year growth in each
variable for a 6-year window – 12 quarters before and 12 quarters after a peak. We
focus on year-on-year changes in the relevant variables since quarter-to-quarter
changes can be quite volatile and provide a noisy presentation of recession dynamics.
All panels include median growth rate, along with the top and bottom quartiles, and,
according to our definition, the severe recessions in the bottom quartile.
The evolution of output growth around a recession is as expected, and also as
observed in the current recession. Following the peak at date 0, output tends to reg-
ister negative annual growth after three quarters, going down to –1% four quarters
after the peak and in severe recessions, to –2%. Although in a typical recession
consumption does not decrease on a year-to-year basis, it does fall during the first
year of a severe recession. In terms of timing, the evolution of consumption around
recessions resembles the behaviour of output.
8 8
Output Private Consumption
6 6
4 4
2 2
0 0
–2 –2
–4 –4
–12 –8 –4 0 4 8 12 –12 –8 –4 0 4 8 12
20 20
Residential Investment Non-Residential Investment
15 15
10 10
5 5
0 0
–5 –5
–10 –10
–15 –15
–20 –20
–12 –8 –4 0 4 8 12 –12 –8 –4 0 4 8 12
20 10
Total Investment Industrial Production
15 8
10 6
4
5
2
0
0
–5
–2
–10
–4
–15 –6
–20 –8
–12 –8 –4 0 4 8 12 –12 –8 –4 0 4 8 12
Figure 3. Dynamic of recessions (percentage change from a year earlier unless

otherwise noted; zero denotes peak; x-axis in quarters)
Notes: The solid line denotes the median of all observations while the dotted lines correspond to the upper
and lower quartiles. Zero is the quarter after which a recession begins (peak in the level of output). Inflation
rate, unemployment rate, net exports/GDP, and current account balance are the levels of the respective vari-
ables in percentages.
Some macroeconomic variables naturally show signs of slowdown before the

recession starts. For example, residential investment typically declines ahead of the
onset of a recession, a very prominent feature of the current recession. Moreover,
both components of investment (residential and non-residential) often register
14 10
Inflation Rate Unemployment Rate
9
12
8
10 7
8 6
5
6
4
4 3
2
2
1
0 0
–12 –8 –4 0 4 8 12 –12 –8 –4 0 4 8 12
15 15
Exports Imports
10 10
5 5
0 0
–5 –5
–10 –10
–12 –8 –4 0 4 8 12 –12 –8 –4 0 4 8 12
4 4
Net Exports/GDP Current Account Balance/GDP
3
2
2
1
0
–2
–1
–2
–4
–3
–4 –6
–12 –8 –4 0 4 8 12 –12 –8 –4 0 4 8 12
Figure 3. (Continued).
negative year-to-year changes even in the first quarter of a recession, i.e. three
quarters ahead of output. And their growth rates typically stay negative for up to
six quarters, i.e. recovery in investment is often later than recovery in output. In
severe recessions, it can take up to three years for investment to recover.
Industrial production also typically registers a decline before a recession starts.
During the onset of a recession, inflation typically is still on an increasing path, and
unemployment is already starting to rise. After the recession starts, however, infla-
tion declines and unemployment rates accelerate. Unemployment is a good leading
12 15
Credit House Prices
10
10
8
6 5
2 0
0
–5
–2
–4 –10
–12 –8 –4 0 4 8 12 –12 –8 –4 0 4 8 12
45
Equity Prices
30
15
–15
–30
–45
–12 –8 –4 0 4 8 12
Figure 3. (Continued).
indicator of economic activity as it typically begins to climb one quarter ahead of a

recession, but it cannot be used to indicate the end of a recession since it stays high
for more than a year after the recession is over.
In terms of trade, in a recession, the growth rates of both exports and imports
slow – the latter much more so. Import growth often falls before the recession starts
and can decline to –7% in the first year of a severe recession. While both net
exports and current account balances typically improve during a recession, the
improvement in net exports is often earlier and more pronounced.
Credit growth also slows down, by some two or three percentage points before a
recession starts, and then by another two percentage points over the recession per-
iod, typically not returning to pre-recession growth rates for at least three years
after its onset. To varying degrees, depending on the importance of bank intermedi-
ated credit, for many countries this phenomenon is observed in the current reces-
sion. Recessions are often also preceded by slowdowns in the growth rates of asset
prices. In the first year of a typical recession, house and equity prices decline on a
year-to-year basis by roughly 3% and 8%, respectively. While equity prices often
start registering positive growth after about six quarters, house prices typically
decline for two more years after the end of a recession. Again, these patterns corre-
spond closely to the current situation.
3.4. Synchronization of recessions, credit contractions and asset price

declines
We next examine the synchronization of recessions, credit contractions and asset

price declines across countries. Our synchronization measure is simply the fraction
of countries experiencing the same event at around the same time. For recessions,
Figure 4 shows this fraction over time alongside the dates of US recessions. The
figure shows that recessions are bunched in roughly four periods. First, there is a
large fraction of countries that suffered recession in the mid-1970s, shortly after the
first oil price shock. More countries were affected during the second oil price shock
in the early 1980s, which is also a period of highly synchronized contractionary
monetary policies across the major industrial economies. In the early 1990s (and to
a degree in the early 2000s) recessions were again highly synchronized around the
world. In the first three of these four periods, more than 50% of the countries in
our sample were suffering a recession.
We define globally synchronized recessions as occurring when more than half of
the countries in our sample were experiencing recession. According to this defini-
tion, there were globally synchronized recession episodes in the years 1975, 1980
and 1992. Table 3 shows that these globally synchronized recessions are signifi-
cantly longer and deeper than in other recessions – generally a quarter longer and
with cumulative output losses more than two times greater. Moreover, they are
associated with more severe contractions in industrial production and greater job
losses. Typical declines in house prices also tend to be much higher.
We also investigate the synchronization of turning points in investment and con-
sumption. A stylized fact related to business cycles is that investment is much more,
and consumption somewhat less volatile than output (Backus et al., 1995).17 In our
sample, investment declines in three-quarters of all cases of recessions while consump-
tion contracts in only half. Consistent with this, the fraction of countries experiencing
investment (consumption) contraction at any time is much higher (lower) than the
proportion experiencing recessions. And while investment contractions are highly
synchronized, consumption contractions are much less so. These results are consistent
with recent findings suggesting that common factors play a much larger role in
explaining fluctuations in investment than in consumption (Kose et al., 2008a).
Recessions tend to coincide with contractions in domestic credit and declines in
asset prices, and again, as currently observed, in most advanced countries. This is
shown by the fraction of countries experiencing recessions being highly correlated
with the fractions suffering credit contractions or bear assets markets (Figure 5).
Credit contractions, in particular, are closely associated with recessions. House price
declines are also highly synchronized across countries, with the degree of synchroni-
17
For a detailed analysis of the volatility and co-movement properties of business cycles for a large set of countries, see Kose
et al. (2003b, 2003c).
60
50
Output
40
30
20
10
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
60
50 Output
40
30
20 Consumption
10
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
80
70
60 Investment
50
40
30
20
10 Output
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Figure 4. Synchronization of recessions

Notes: Share of countries experiencing recessions in output, consumption and investment. Shaded bars indicate
periods of US recessions.
zation rising especially during recession episodes. Equity prices exhibit the highest
degree of synchronization, reflecting the extensive integration of stock markets.
However, the popular saying that ‘Wall Street has predicted nine of the last five
recessions’ resonates as the fraction of countries experiencing bear equity markets
frequently exceeds the fraction of countries in recession. Conversely, booms in
equity markets are not necessarily associated with economic recoveries.
674
Table 3. Synchronized recessions: summary statistics (percentage change unless otherwise indicated)
All recessions Synchronized Other All recessions Synchronized Other

recessions recessions recessions recessions
A. Output
Durationa 3.00 4.00*** 3.00 3.64 4.54** 3.25
Amplitude )1.87 )2.56*** )1.47 )2.63 )3.35* )2.32
Cumulative loss )3.04 )4.9*** )2.06 )6.40 )10.69* )4.53
Consumption )0.07 )0.93*** 0.30 )0.16 )1.41*** 0.38
Total investment )4.15 )8.16*** )2.26 )5.93 )9.8** )4.26
Residential investment )4.08 )5.85** )3.08 )6.64 )10.62** )4.92
Non-residential investment )3.63 )9.01*** )1.19 )5.10 )9.64*** )3.09
Exports )0.65 )1.48* 0.48 )0.74 )2.22 )0.10
Imports )3.82 )8.18*** )0.96 )4.20 )8.93*** )2.14
Net export (% of GDP)b 0.62 1.35** 0.40 0.76 1.44** 0.46
Industrial production )4.14 )6.5*** )2.60 )3.99 )6.84*** )2.71
Unemployment rateb 0.61 1.17*** 0.45 1.16 1.85** 0.84
Inflation rateb )0.29 )0.36 )0.27 )0.27 0.03 )0.40
House prices )2.31 )5.05*** )1.89 )3.57 )7.58*** )1.62
Equity prices )5.93 )4.18 )7.45 )4.43 )4.33 )4.47
Credit 0.75 0.34** 0.90 1.07 )1.75*** 2.32
Notes: Synchronized recessions are when 10 or more of the countries in the sample experience recessions at the same time. Other recessions refer to episodes that are not
synchronized. In each cell, the mean (median) change in the respective variable from peak to trough of recessions is reported, unless otherwise indicated. (The symbols *,
**, and *** indicate that the difference between means (medians) of synchronized recessions and other recessions is significant at the 10%, 5%, and 1% levels, respectively.)
a
Number of quarters.
b
Change in levels.
60
40 Credit
20
Output
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
80
60
House Prices
40
20
Output
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
100
80
Equity Prices
60
40
20
Output
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Figure 5. Synchronization of credit contractions and asset price declines

Notes: Share of countries experiencing episodes of credit contractions, house price declines and equity price
declines. Shaded bars indicate periods of US recessions.
3.5. Credit contractions and asset price declines
Next, we provide similar statistics, but in summary form, on episodes of credit con-
traction, and house price and equity price declines (see Claessens et al., 2008 for
details). In terms of duration, episodes of house price declines and busts last longer
than credit contractions/crunches or equity price declines/busts (Table 4). While
676
Table 4. Credit contractions and asset price declines: summary statistics (percentage change unless otherwise indicated)
b
Events Durationa Amplitude Total investment Residential investment Non-residential Unemployment
(mean) (median) (median) (median) investment (median) (median)
A. Credit contractions 5.52 )4.08 )0.79 )1.77 0.05 0.48

Credit crunches 10.29*** )13.26*** )6.13*** )6.37*** 0.09 1.76***
Other credit contractions 3.95 )3.20 )0.17 )1.13 0.02 0.22
B. House price declines 8.47 )5.99 0.72 )4.08 2.00 0.50
House price busts 18.14*** )28.52*** )8.36*** )11.55*** )7.79** 2.8***
Other house price declines 5.33 )4.14 2.22 )0.96 2.64 0.23
C. Equity price declines 6.64 )23.70 3.67 2.96 4.17 0.05
Equity price busts 11.79*** )50.62*** 0.67* 3.04 2.79 0.7***
Other equity price declines 4.93 )19.20 3.99 2.94 4.42 )0.04
Notes: Credit crunches and asset price busts correspond to peak-to-trough declines in credit and asset prices that are in the top 25% of all episodes of credit contractions and
asset price declines, respectively. In each cell, the mean (median) change in the respective variable from peak to trough of the episodes of credit declines/crunches, house
price declines/busts, and equity price declines/busts is reported, unless otherwise indicated. The symbols *, **, and *** indicate that the difference between means (medians)
of crunches/busts and other contractions/declines is significant at the 10%, 5%, and 1% levels, respectively.
a
Number of quarters.
b
Change in levels.
less persistent than house price declines, drops in equity prices are much larger. In
particular, a typical episode of house price decline (bust) leads to a 6% (29%) drop
in house prices, while an episode of equity price decline (bust) tends to result in a
24% (51%) fall in equity prices. Both credit crunches and house price busts appear
to have adverse effects on the growth rates of investment, its components and
unemployment. House price busts, in particular, are associated with large drops in
investment and employment. Residential investment, for example, declines by 6%
and 12% during credit crunches and house busts, respectively. The current
recessions and financial events reflect these patterns which are associated with
severely stressed housing markets in many countries.
4. WHAT HAPPENS DURING RECESSIONS ASSOCIATED WITH CRUNCHES

AND BUSTS?
4.1. Leads and lags between recessions, crunches and busts
We first examine the lag between the start of a credit crunch or bust, and the
beginning of the corresponding recession. If a recession is associated with a credit
crunch, it typically starts three quarters after the onset of the credit crunch, three
quarters after a house price bust, and five quarters after an equity price bust
(Table 5). Since credit crunches last longer than recessions, the latter tend to end
two quarters before their corresponding credit crunch episodes. These findings sug-
gest that the phenomenon of ‘creditless recovery’ is not specific only to sudden stop
episodes observed in emerging markets (see Calvo et al., 2006), but is also a feature
of the business cycles of the industrial countries in our sample. House price busts
typically last well beyond the end of the corresponding recession, or to put it differ-
ently, recessions end nine quarters ahead of the corresponding house price busts.
This is because house price busts typically last three times longer than do reces-
sions. The duration of a typical equity price bust is twice that of a recession, but a
recession tends to end with its corresponding equity bust.
Table 5. Leads and lags: recessions, crunches and busts (number of quarters)
A. Leadsa
Credit crunches 3.00 4.11
House price busts 3.00 4.22
Equity price busts 5.00 5.26
B. Lagsb
Credit crunches 2.00 2.63
House price busts 9.00 10.52
Equity price busts 0.00 2.74
Notes: aNumber of quarters between the start of a crunch/bust and the start of a recession.
b
Number of quarters between the end of a recession and the end of a crunch/bust.
678
Table 6. Recessions associated with credit crunches (percentage change unless otherwise indicated)
Without With With Without With With severe

crunches crunches severe crunches crunches crunches crunches
A. Output
Durationa 3.00 3.00 3.00 3.61 3.90 4.00
Amplitude )1.76 )2.7** )2.20 )2.33 )4.17** )4.13
Cumulative loss )2.66 )6.15** )6.15* )5.84 )9.46 )11.79
Consumption )0.04 )0.58 )0.58 )0.15 )0.36 0.38
Total investment )3.65 )5.57 )5.57 )5.67 )6.75 )6.28
Residential investment )3.72 )7.52 )7.47 )6.19 )9.60 )9.13
Non-residential investment )3.58 )4.25 )4.34 )5.18 )3.81 )4.65
Exports )0.46 )2.44 )1.28 )0.46 )2.88 )2.26
Imports )3.15 )6.47** )6.47* )3.34 )7.94 )8.64
Net export (% of GDP)b 0.43 1.51** 1.64** 0.51 1.81** 1.89**
Industrial production )4.02 )5.55 )6.76* )3.89 )4.78 )6.41*
Unemployment rateb 0.57 0.89 0.99 1.21 0.99 1.10
Inflation rateb )0.32 0.14 0.53 )0.56 0.97 1.08
House prices )1.83 )3.91** )5.95* )3.09 )6.55 )7.64
Equity prices )6.18 )3.09 0.60 )4.57 )1.83 2.68
Credit 1.13 )4.41*** -4.91*** 2.30 )4.72*** )6.11**
Notes: Severe credit crunches are those that are in the top half of all crunch episodes. Each cell reports the mean (median) change in the respective variable from peak to
trough of recessions associated with credit crunches, unless otherwise indicated. The symbols *, **, and *** indicate that the difference between means (medians) of reces-
sions with and without credit crunches is significant at the 10%, 5%, and 1% levels, respectively.
a
Number of quarters.
b
Change in levels.
4.2. Recessions associated with credit crunches
Table 6 presents the main features of recessions associated with and without credit
crunches. To provide a sense of their distribution, we examine separately the
features of recessions coinciding with severe credit crunches or asset price busts, i.e.
the top 12.5% of all credit contractions or asset price declines. The average dura-
tion of a recession associated with a (severe) credit crunch slightly exceeds that
without a crunch, but the difference is not significant. Interestingly, in all but four
cases, recessions ended before the end of their corresponding credit crunch epi-
sodes. Typically, there is a significantly larger output decline during recessions asso-
ciated with a credit crunch compared to other recessions, –2.7 versus –1.8%, or a
0.9 percentage point difference. As would be expected, the amplitude of recessions
coinciding with credit crunches differ across countries and episodes. For instance,
the amplitude of the recession experienced in Portugal in 1982–84 was about 2.7%
while that experienced in Belgium in 1982 was only 0.2%.
The cumulative output loss in recessions associated with (severe) crunches is typi-
cally larger than in recessions without crunches. In particular, the average (median)
cumulative loss of a recession associated with a severe crunch is more than twice
that without a crunch (i.e. significantly higher). Recessions with severe crunches are
generally associated with larger contractions in consumption, investment, industrial
production, employment, exports and imports, compared to recessions without
crunches. However, with the exception of imports, net exports and industrial
production, these differences are not significant.
Credit, by construction, registers a much larger (and statistically significant)
decline in recessions with crunches than those without. House prices also fall signifi-
cantly more in recessions with crunches than in those without. This might stem
from the high sensitivity of housing activity to credit conditions, also observed in
the current episode. In contrast, equity prices decrease less in recessions with
crunches and even record increases in recessions with severe crunches. This may be
because equity prices decline more at the onset of such recessions and markets
anticipate a recovery during the recessions.
4.3. Recessions associated with house price busts
There are a number of statistically significant differences between recessions coincid-

ing with and without house price busts (Table 7). In particular, recessions associated
with house price busts on average last for more than a quarter longer than those with-
out busts. Moreover, declines in output (and corresponding cumulative losses) are typ-
ically much greater in recessions with busts, –2.2% (–3.8%) versus –1.5% (–2.2%)
without busts. These sizeable differences extend to other variables. For example,
although consumption typically does not decrease much in a recession, there is a sig-
nificant decline in consumption in recessions associated with house price busts. The
680
Table 7. Recessions associated with house price busts (percentage change unless otherwise indicated)
Without busts With busts With severe busts Without busts With busts With severe busts
A. Output
Durationa 3.00 3.00 3.00 3.18 4.55** 4.6**
Amplitude )1.51 )2.2* )2.64** )1.96 )3.24* )4.05**
Cumulative loss )2.24 )3.84*** )5.23*** )3.48 )10.68** )13.90*
Consumption 0.05 )0.76*** )1.16*** 0.13 )l.71*** )2.25***
Total investment )3.82 )7.77* )6.92 )4.59 )9.48** )9.59
Residential investment )2.46 )6.79** )7.47** )4.63 )11.31** )13.65**
Non-residential investment )3.67 )7.7* )6.82 )4.06 )8.84* )7.83
Exports )1.07 0.68* 0.67 )1.02 1.03* 1.20
Imports )2.65 )5.23 )5.3* )2.24 )5.26* )6.13**
Net export (% of GDP)b 0.41 1.24*** 1.29** 0.09 1.5*** 1.48**
Current account (% of GDP)b 0.07 0.78** 0.6* 0.02 1.27** 1.23*
Industrial production )4.43 )4.26 )4.99 )4.13 )4.35 )4.73
Unemployment rateb 0.47 1.36*** 1.2*** 0.83 2.02** 1.93
Inflation rateb )0.26 )0.80 )0.59 )0.35 )0.88 )0.14
House prices )0.84 )6.3*** )7.05*** )0.34 )9.63*** )11.17***
Equity prices )8.85 0.61* )7.22 )6.87 0.06 )1.59
Credit 1.42 )0.52*** )1.24*** 3.01 )2.37*** )2.99***
Notes: Severe house price busts are those in the top half of all bust episodes. Each cell reports the mean (median) change in the respective variable from peak to trough of
recessions associated with house price busts, unless otherwise indicated. The symbols *, **, and *** indicate that the difference between means (medians) of recessions with
and without house price busts is significant at the 10%, 5%, and 1% levels, respectively.
a
Number of quarters.
b
Change in levels.
large fall likely reflects the substantial effects of housing wealth on consumption.
These findings taken together, suggest that recessions that coincide with house price
busts result in more adverse macroeconomic outcomes than those that do not. Still,
there are differences across episodes in the output costs of recessions associated with
house price busts. For example, the amplitude of the recession in Austria in the early
2000s was only 0.4% while Canada’s early 1980s recession was close to 5%. The
duration of the former was two quarters while the latter lasted six quarters.
In terms of trade variables, there are substantial differences between recessions
coinciding with house price busts and other types of recessions, in part reflecting
the substantial decline in domestic demand and, thus, imports. Along with
increased exports, both net exports and current account balances improve signifi-
cantly more in recessions with house price busts.
With respect to financial outcomes, by construction, house prices fall much more
in recessions with housing busts (by some 6 percentage points more), but credit also
contracts more, with both differences significant. Equity prices also decline during
recessions associated with severe busts, but less so than those without busts, because
markets may already be pricing in a recovery (however, these differences are not
significant). Taken together, these comparisons suggest that the more adverse effects
of a recession with a (severe) house price bust, arise in part due to disturbed credit
markets, which, in turn, lead to a considerable reduction in consumption and
(residential) investment. This phenomenon has been considered a key factor in the
current recession (see Leamer, 2007; Muellbauer, 2007). When a recession is
associated with a house price bust, residential investment remains depressed for a
prolonged period typically only recovering three to five quarters after the recession
ends.
4.4. Recessions associated with equity price busts
Although recessions associated with equity price busts tend to be longer and deeper
than those without equity busts, many of the differences are not statistically signifi-
cant (see Claessens et al., 2008 for details). This might reflect the fact that the link
between equity price busts and developments in the real economy is weaker com-
pared to credit crunches and house price busts. Nevertheless, non-residential and
total investment, and industrial production fall significantly more in recessions with
equity price busts than in recessions without equity price busts. Imports also decline
significantly more and net exports improve much more in recessions with equity
price busts.
4.5. Recessions associated with crunches and busts: a comparison
When associated with a credit crunch or asset price bust, which type of recession is
the most painful? The answer depends in part on the metric used to measure the
Table 8. Recessions associated with crunches and busts: summary statistics
Events Durationa Amplitude Cumulative

(mean) (median)b lossb (median)
A. Recessions without credit crunches 3.61 )1.76 )2.66

Recessions with credit crunches 3.90 )2.7** )6.15**
Recessions with severe credit crunches 4.00 )2.20 )6.15*
B. Recessions without house price busts 3.18 )1.51 )2.24
Recessions with house price busts 4.55** )2.2* )3.84***
Recessions with severe house price busts 4.6** )2.64** )5.23***
C. Recessions without equity price busts 3.49 )1.72 )2.87
Recessions with equity price busts 3.79 )1.73 )2.66
Recessions with severe equity price busts 3.68 )1.98 )3.16
D. Recessions without financial crises 3.36 )1.80 )2.65
Recessions with financial crises 5.67** )2.52 )4.92***
Recessions with severe financial crises 6.80 )2.76 )4.92***
Notes: Severe credit crunches and equity/house price busts are in the top half of all crunch and bust episodes.
Severe financial crises correspond to the big five crisis episodes listed in the text. Each cell reports the mean (med-
ian) change in the respective variable from peak to trough of recessions associated with equity price busts, unless
otherwise indicated. The symbols *, **, and *** indicate that the difference between means (medians) of reces-
sions with and without equity price busts is significant at the 10%, 5%, and 1% levels, respectively.
a
Number of quarters.
b
Percent change.
cost of the recession. If we use amplitude as the metric, then recessions associated
with credit crunches appear to be as costly as recessions with house price busts,
and both slightly more costly than recessions with equity price busts (Table 8).
However, if we use the cumulative loss measure as the metric, then recessions asso-
ciated with credit crunches are slightly more costly than those associated with house
price busts. Recessions with equity price busts are the least costly according to this
metric.
Why are recessions that coincide with house price busts more costly than those
without such busts? For one, investment, and especially consumption, usually regis-
ter much sharper declines during recessions coinciding with house price busts than
in those associated with equity busts. The larger decline in consumption likely
reflects the adverse effects on households of the substantial loss of housing wealth.
Moreover, recessions with house price busts lead to more pronounced drops in
employment.18
The differential wealth effects of housing versus equity assets may arise for sev-
eral reasons. First, housing represents a large share of wealth for most households
and consequently price adjustments affect consumption and output more, on both
the up and down sides. In contrast, equity ownership is smaller and typically con-
centrated among wealthy households who likely make much smaller adjustments to
their consumption over the cycle. Housing wealth has been found to have a bigger
effect than equity wealth on consumption. For example, Carrol et al. (2006) report
18
Several interactions can occur between housing prices and unemployment. If households have to deal simultaneously with
diminished employment prospects and lower house values, labour mobility will be less than otherwise.
that the propensity to consume based on a $1 increase in housing wealth ranges

between 2 (short-run) and 9 (long-run) cents, which is twice that for equity wealth.
Second, equity prices are more volatile than house prices, implying that changes
in house prices are more likely to be permanent than changes in equity prices
(Cecchetti, 2006). Kishor (2007) reports that while 98% of the change in housing
wealth is permanent, this applies to only 55% of the change in financial wealth.
Based on this, households will make greater adjustments to their consumption
when house prices decline, leading to larger declines in output during recessions
associated with house price busts. The balance sheet effects of house price changes
are also more severe, as housing wealth dictates heavier household borrowing con-
straints overall.
We also study the implications of recessions accompanied by a credit crunch and
an asset (house or equity price) bust simultaneously (see Claessens et al., 2008).
Although the number of observations for such cases is small, these recessions often
involve larger cumulative output losses than those with only a crunch or a bust.19
For example, the median cumulative loss from the six recessions associated with
both a credit crunch and a house price bust is 5%.
We also explore how financial crises interact with recessions. Reinhart and
Rogoff (2008, 2009) examine the parallels between the 2007–2008 crisis and earlier
banking crises. Their sample includes the ‘big five’ advanced economy banking
crises (Spain, 1977; Norway, 1987; Finland, 1991; Sweden, 1991; and Japan, 1992),
a number of well-known emerging market episodes, and the Great Depression.
They point to the strong similarities between the ongoing crisis and these major his-
torical episodes. For example, similar to the ongoing episode, the earlier crises were
preceded by a period of asset price inflation, rising leverage, large current account
deficits, and slowing growth.
Since our focus is on recessions rather than financial crises, we cannot conduct a
full comparison of our findings and the results provided by Reinhart and Rogoff.20
However, we can examine briefly the implications of recessions associated with
financial crises episodes (Table 8). Using the crisis dates compiled by Terrones et al.
(2009) who extend Reinhart and Rogoff’s sample, we consider a recession episode
associated with a crisis, as beginning at the same time or after the start of an on-
going crisis. We find 15 recession episodes associated with financial crises, including
the ‘big five’ crises that Reinhart and Rogoff focused on, which we call severe
crises.
19
There are five recessions associated with both a credit crunch and an equity price bust. There are only four recessions in
our sample that are accompanied by a credit crunch and a house price and equity price bust. While these cases are also asso-
ciated with larger cumulative output losses, they are not significantly different from the others we examined. We also investi-
gate the implications of recessions associated with different combinations of credit contraction/crunch and asset price
decline/bust episodes. The results are similar to those reported, that recessions accompanied by financial market difficulties
are generally more severe.
20
The dating of a financial crisis is also more subjective than the dating we apply to recessions, credit contractions and asset
price declines, which makes comparison across studies more difficult.
The average duration of a recession associated with a (severe) financial crisis

exceeds that without one, by two (three) quarters. There is typically a larger output
decline in recessions associated with crises compared to other recessions, –2.5 versus
–1.8%, or a 0.7 percentage point difference (although this is not statistically signifi-
cant). The cumulative output losses in recessions associated with (severe) crises are
typically also larger compared to those without crises, by roughly two times (but
this is not significant). Recessions with crises are generally of longer duration than
those associated with credit crunches, but the cumulative losses in the former are
typically smaller than those resulting from the latter.
5. POLICY RESPONSES DURING RECESSIONS, CRUNCHES AND BUSTS
There are many ways in which policy-makers can respond to a recession, credit
crunch or asset price bust, including, besides monetary and fiscal policies, interven-
tions in the financial and corporate sectors, quasi-fiscal operations, changes in
exchange rate management, structural reforms etc. To keep matters manageable, and
to retain comparability across the diverse set of countries and events under consider-
ation, we consider two policy responses: monetary policies, proxied by changes in
(short-term) interest rates, and fiscal policies, captured by changes in government con-
sumption.21 Although we are aware of the problems involved in associating these vari-
ables to the rather broad concepts of fiscal and monetary policy, in our view, these
data are illustrative of some general patterns across different types of recessions.
Table 9 reports the medians for peak-to-trough changes in the policy variables for
our different combinations of events. Policy responses vary across types and severity
of events. Both monetary and fiscal policies tend to be countercyclical during reces-
sions, credit contractions and asset price declines. Moreover, fiscal policy appears to
be more accommodating in severe recessions, credit crunches and asset price busts.
In episodes involving credit crunches, and house price and equity price busts,
government consumption rises significantly more than in other contraction and
decline episodes. A more aggressive countercyclical fiscal policy is at work in reces-
sions with credit crunches, possibly because monetary policy is less effective in these
circumstances. During house price busts, the decline in nominal interest rates is also
significantly larger than during episodes without house price busts. In addition, the
decline in real interest rates is significantly larger during episodes with equity price
busts than during episodes without. However, other differences are not significant.
For example, while government consumption increases more in severe recessions
than in other recessions, the difference is not significant.
With respect to recessionary episodes coinciding with crunches and busts,
while most differences in policy responses are intuitively appealing, they are not
21
Alternative measures of fiscal and monetary policies, including government revenue and money supply, show patterns
broadly consistent with those of the benchmark measures we use here.
Table 9. Changes in policy variables (recessions, credit contractions and asset

price declines; median values)
Events Short-term Short-term Government

nominal real consumptionc
interest ratea interest rateb
A. Recessions )0.79 )0.70 1.79

Severe recessions 0.00 )1.11 2.16
Other recessions )0.94 )0.66 1.61
B. Credit contractions )0.27 )1.03 2.83
Credit crunches )0.71 )0.76 5.98***
Other credit contractions )0.27 )1.03 2.03
C. House price declines )0.70 )0.64 3.39
House price busts )2.86** 0.60 8.75***
Other house price declines )0.20 )0.82 2.59
D. Equity price declines 0.21 )0.22 3.59
Equity price busts 0.50 )1.13** 7.48***
Other equity price declines 0.17 )0.06 2.95
E. Recessions without credit crunches )0.95 )0.66 1.57
Recessions with credit crunches )0.17 )0.79 3.23***
Recessions with severe credit crunches )0.17 )0.79 4.57***
F. Recessions without house price busts )0.95 )0.77 1.73
Recessions with house price busts )1.14 )0.58 1.82
Recessions with severe house price busts )1.04 )0.78 2.12
G. Recessions without equity price busts )0.80 )0.72 1.62
Recessions with equity price busts )1.00 )0.77 2.14
Recessions with severe equity price busts )0.87 )0.57 2.16
Notes: Severe recessions are those in which the peak-to-trough decline in output is in the top 25% of all reces-
sion-related output declines. Credit crunches and asset price busts correspond to peak-to-trough contractions
in credit and declines in asset prices, that are in the top 25% of all episodes of credit contractions and asset
price declines, respectively. Severe credit crunches and equity/house price busts are those that are in the top
half of all crunch and bust episodes. Other contractions and declines refer to episodes that are not crunches
and not busts, respectively. Each cell reports the mean (median) change in the respective variable from peak
to trough of relevant episodes, unless otherwise indicated. The symbols *, **, and *** indicate that the differ-
ence between means (medians) of crunches/busts/shocks and other contractions/declines is significant at the
10%, 5%, and 1% levels, respectively.
a
Treasury bill interest rate. Change in levels.
b
Ex-post real interest rate. Deflated with each country’s CPI. Change in levels.
c
Percent change.
statistically significant. The only difference that is significant is government con-

sumption during recessions with credit crunches, when the growth rate increases to
twice that in recessions without crunches.
6. RECESSION OUTCOMES AND FINANCIAL FACTORS
In this section, we employ basic regression models to examine how the amplitude
of a recession is associated with changes in financial variables, considering at the
same time fiscal and monetary policies in place, and domestic and global economic
conditions. This exercise provides further insights into the roles played by the
various financial factors influencing the severity of recessions. A number of distinct
factors can affect recession outcomes; our regressions focus on a small set of vari-
ables based on the findings in the previous sections and the literature. Our objective
here is not to analyse the sources of recessions, but simply to correlate some (finan-
cial) factors to the cost of recessions.
The previous sections show that recessions associated with credit crunches and
house prices busts are more costly than those without such episodes. Therefore, we
include changes in credit, housing and equity prices during recessions as regressors.
We also analyse how general economic conditions prevailing at the onset of a reces-
sion are associated with recession outcomes. We proxy this with cumulative growth
of output over the two years preceding the recession. This allows us to examine
whether the strength of the expansionary phase of the cycle plays a role in deter-
mining the depth of the ensuing recession. Since external demand can buffer down-
turns in domestic demand that occur in a recession, we control for global economic
conditions by including changes in exports. Since fluctuations in oil prices are often
seen as factors affecting recession outcomes, we include growth in oil prices in the
two years preceding the recession.
Fiscal and monetary policies are often employed to mitigate the costs of reces-
sions. While many observers argue that they can have a moderating effect, others
claim that they do not affect recession outcomes. In our regressions we simply
include changes in government expenditure and short-term real interest rates while
recognizing that these variables also respond to a recession. Thus, our regressions
identify associations, not necessarily causalities.
To account for the ‘Great Moderation’ in the volatility of business cycles since
the mid-1980s, we include a dummy, which takes the value of one after 1986:2,
and zero otherwise. We also investigate the effects of financial crises on recessions
by including a crisis dummy, which takes the value of one if the country experi-
ences a banking crisis, a currency crisis, or both crises during or in the year prior
to a recession, and zero otherwise.
Table 10 reports the results of our OLS regressions.22 Each of the financial vari-
ables enters into the regressions separately in the first three columns. The coeffi-
cients of the financial variables are positive, i.e. the extent of the declines in credit,
house prices and equity prices are positively associated with the depth of the reces-
sions, with house and equity prices statistically significant. Importantly, a decline in
house prices seems to have a greater influence on the cost of recession compared to
a contraction in credit or a drop in equity prices.
Column 4 includes house prices and changes in credit, and Column 5 includes
all of the financial variables. The coefficients for housing and equity prices remain
statistically significant and positive while the coefficient of credit is significant, but
with a different sign.23 Column 6 augments the regression by adding duration of
22
We also ran quantile regressions to examine the effects of outliers in our sample; the results were similar. We used other
robust methodologies to account for outliers and our main results were maintained.
23
A possible reason why credit is not a robust determinant of the costs of a recession could be that the volume of credit
starts to decline only after the banks tighten their lending standards. Credit standards (more than the volume of credit) are
negatively correlated with economic activity (Lown and Morgan, 2006).
Table 10. Regression results for the cost of recessions (percentage change in real variables unless otherwise indicated)
OLS regressions
CRUNCHES AND BUSTS
(1) (2) (3) (4) (5) (6)
Credit 0.053 [0.037] – – )0.087** [0.036] )0.082** [0.035] )0.049 [0.042]

House price – 0.165*** [0.043] – 0.212*** [0.051] 0.204*** [0.046] 0.152*** [0.054]
Equity price – – 0.029* [0.015] – 0.022** [0.010] 0.016 [0.012]
Exports 0.107** [0.041] 0.063 [0.047] 0.014 [0.054] 0.075* [0.044] 0.064 [0.048] 0.072 [0.047]
Initial output 0.198** [0.100] 0.198** [0.087] 0.199** [0.098] 0.177* [0.094] 0.167* [0.096] 0.170* [0.096]
Oil price )0.008 [0.005] )0.008* [0.005] )0.003 [0.004] )0.006 [0.004] )0.005 [0.004] )0.003 [0.004]
Great moderation )0.880* [0.523] )1.001** [0.456] )0.832* [0.498] )0.973** [0.439] )0.958** [0.430] )0.909** [0.416]
Financial crisis )0.051 [0.556] )0.240 [0.456] 0.246 [0.461] )0.087 [0.409] )0.013 [0.388] )0.102 [0.362]
Government consumption 0.012 [0.148] 0.062 [0.164] 0.153 [0.168] 0.048 [0.155] 0.075 [0.145] 0.133 [0.154]
Short-term interest rate 0.093 [0.153] 0.082 [0.116] 0.245 [0.150] 0.059 [0.111] 0.068 [0.107] 0.006 [0.099]
Duration of recessiona – – – – – 0.302** [0.129]
Constant 1.801** [0.696] 1.294* [0.693] 1.299* [0.743] 1.070 [0.695] 1.052 [0.680] 0.314 [0.745]
Adjusted R-squared 0.196 0.334 0.152 0.377 0.394 0.419
Number of observations 115 94 107 94 94 94
Notes: The dependent variable is the amplitude of the recession, measured as the change in output from the peak to the next trough of the recession. Credit, house price,
equity price, exports, government consumption, and short-term interest rate refer to changes in the respective variable during recessions. Initial output is the level of output
at the onset of the recession minus the level of output two years earlier. Oil price is the price of oil at the onset of the recession minus the oil price two years earlier. Great
Moderation and Financial Crisis refer to the dummy variables associated with the relevant periods. Robust standard errors are in brackets. The symbols *, **, and *** indi-
cate statistical significance at the 10%, 5%, and 1% levels, respectively.
a
Number of quarters.
687
the recession. Changes in house prices are again significantly positive, but the other
financial variables are no longer significant.
Overall, these results suggest that changes in house prices are important in terms
of the costs of recessions, as argued by Cecchetti (2006) among others. This impor-
tance extends to changes in the main components of output in recessions associated
with house price busts versus other recessions, including those accompanied by
credit crunches. As reported, investment – and particularly consumption – usually
register much sharper declines during recessions coinciding with house price busts
than during those coinciding with credit crunches. The larger decline in consump-
tion likely reflects the effects on households of the substantial loss of housing wealth.
These sharper declines, in turn, are associated with more pronounced drops in
employment.
In terms of the other factors reflecting the synchronous nature of recessions
across countries, decline in exports is positively correlated to the depth of the reces-
sion, although it is significant only in two of the specifications. The higher the
growth during the expansionary phase of the cycle, the larger the contraction dur-
ing the recessionary phase, a finding which is significant in all specifications. This
suggests that the strength of the expansion affects the degree of build-up of the
imbalances. The Great Moderation of milder recessions is visible in most of the
specifications.
Neither the change in oil prices nor the presence of a financial crisis appears to
affect, in a statistically significant, robust way the severity of a recession.24 This
could be because the changes in the financial variables capture the effect of the
crises on the costs of the recessions. However, this explanation may not be robust
since the results change in some specifications. As expected, the amplitude of a
recession is positively associated with its duration.
We also study the roles of fiscal and monetary policies during recessions. We find
that while, as expected, expansionary policies are associated with less severe reces-
sions, none of the relations are statistically significant. This lack of significance
could have several explanations. First, we are studying only two narrow aspects of
the policy choices available during a recession. Second, as noted, there are various
problems involved in associating these specific measures to the rather broad con-
cepts of fiscal and monetary policies and our measures are rough proxies at best.25
24
In some specifications (not reported), the coefficient of the crisis dummy becomes positive and statistically significant. This
result echoes the findings in Bordo et al. (2001) that banking, currency and twin crises are positively correlated with the sever-
ity of a recession (see also Cerra and Saxena, 2008).
25
We undertook some additional sensitivity exercises. In particular, we consider cyclically adjusted government consumption
and deviations of interest rates from the monetary policy (Taylor) rule as alternative measures of fiscal and monetary policy
stances, respectively. These additional regressions lead to similar findings. An alternative approach would be to consider how
monetary and fiscal policies affect the probability of exiting a recession, and strength of the recovery. Terrones et al. (2009)
report that expansionary monetary policies increase the likelihood of exiting from a recession while expansionary fiscal poli-
cies have no significant impact. They also find that both fiscal and monetary expansions during recessions are accompanied
by stronger recovery. However, the state of the public balances limits the effectiveness of fiscal policies during recovery epi-
sodes.
Third, it is known that macroeconomic policies tend to affect output with a lag.
Moreover, while fiscal and monetary policies often aim to be countercyclical, there
are instances where procyclical monetary policies were in place, for example, to
combat inflation. Importantly, the inclusion of these policy measures does not
change our findings with respect to the role of financial factors in predicting the
costs of recessions. In summary, our main finding is that changes in housing prices
are significantly and positively correlated with the costs of recessions, while the
results for the impact of most other variables are consistent with those reported in
the literature.
7. CONCLUSION AND POLICY LESSONS
7.1. What have we learned?
This study provides a comprehensive analysis of the linkages between key

macroeconomic and financial variables around business and financial cycles, for 21
OECD countries for the period 1960–2007. We focused first on the behaviour of
these variables around recessions, credit crunches and asset (house and equity) price
busts. Our results suggest that the typical recession lasts for almost four quarters
and is associated with an output drop (decline from peak to trough) of roughly 2%.
Severe recessions, by construction, are much more costly, with a median decline of
about 5%, and last one quarter longer. While typical recessions tend to result in a
cumulative loss of about 3%, severe ones cost three times as much. As would be
expected, most macroeconomic and financial variables exhibit procyclical behaviour
during recessions. And two key policy related variables – short-term interest rates
and fiscal expenditures – often behave countercyclically.
We find that recessions are bunched in four periods over the past 40 years – the
mid-1970s, the early 1980s, the early 1990s and the early 2000s – and often coin-
cide with global shocks. Globally synchronized recessions are longer and deeper
than other recessions: the average duration of a synchronized recession tends to be
a quarter longer, and often accompanied by twice the cumulative output losses as
in other recessions. Countries also go through simultaneous episodes of credit con-
tractions and declines in house and equity prices.
We investigated the coincidence of a recession with a credit crunch or asset price
bust. In about one in six recessions, there is also a credit crunch underway, and in
about one in four recessions there is also a house price bust. Equity price busts
overlap with about one in three recessions. A recession, if it occurs, can start as late
as four to five quarters after the onset of a credit crunch or an asset bust. But
credit crunches or asset price busts can continue for two to nine quarters after the
recession has ended.
We analysed the implications of recessions associated with credit crunches and
asset price busts. In terms of duration and severity, we find that recessions associ-
ated with housing busts and credit crunches are both deeper and longer-lasting
than other recessions. Differences in total output loss between events with and with-
out severe crunches and busts, typically amount to one percentage point, while the
duration is more than one quarter longer in the case of housing busts. In terms of
the behaviour of key macroeconomic and financial variables, we find that residen-
tial investment tends to fall more sharply in recessions with housing busts and credit
crunches than in other recessions. Unemployment rates increase notably more in
recessions with housing busts.
We analysed more formally the special role of financial market conditions in
affecting the depth of a recession. Our results suggest that changes in house prices
tend to be the financial variable most strongly associated with the depth of a
recession. In terms of other factors, decline in output is influenced most strongly by
the duration of the recession and also by the state of the economy at the onset of
the recession.
Our analysis has implications for the current recessions. One is that they will be
long-lasting and more costly than other recessions because they are taking place in
the context of simultaneous credit crunches and asset price busts. This is confirmed
by data showing that many countries around the world are experiencing deep
recessions, with massive financial and real consequences. Indeed, the recession in
the US is on track to be the longest on record. Furthermore, as our analysis sug-
gests, these recessions have spread across the globe, confirmed by our results on the
international dimensions of recessions.
7.2. Policy lessons
Our analysis provides insights on how macroeconomic and financial variables inter-
act around episodes of business and financial cycles, and on the global dimensions
of these episodes. It shows that several factors and policies can shape the nature of
a recession in a particular country and highlights a number of (long-standing) ques-
tions and policy issues. While some of these have been studied in different contexts,
addressing them has become more urgent in light of the ongoing deep recessions
and accompanying severe financial crises in many countries. We review the impli-
cations of our work, therefore, in terms of three aspects: policy approaches to tackle
recessions; the medium- and long-term reforms being considered in various forums;
and lessons for global coordination.
7.2.1. Policy measures. Our work has implications for policy actions to mitigate
recessions. Policy measures employed by various governments to address the reces-
sions triggered by the global financial crisis typically involve a mixture of accommo-
dative monetary and fiscal policies, and various forms of financial sector support.
Furthermore, in some countries, direct support is provided to housing markets to
help resolve debt overhangs (by making public resources available conditional on
borrower and lender renegotiating loans), and to other sectors immediately affected
by the financial turmoil and economic recession (e.g. through commercial paper
programmes, trade finance, small business finance, automobile and student loans).
While our analysis, on its own, does not reveal the costs and benefits of various
policy interventions – this would require a more micro-based analysis of specific
plans and past experience of such interventions – our results do provide some
insights. In terms of short-term policy actions, our data confirm that governments
commonly adopt accommodative fiscal and monetary policies in times of recession.
At the same time, our analysis provides evidence on the limitations of these policies
for mitigating the effects of recessions. Our work also highlights the importance of
stable credit and equity markets, as declines in these markets are often associated
with deeper recessions. Our analysis thus provides support for some of the measures
typically undertaken by governments, including some of those applied during the
recent turmoil. Our results confirm the usefulness of measures to (directly and indi-
rectly) support housing markets, since deeper recessions are often accompanied by
steeper declines in house prices.
7.2.2. Reform options. The medium-term reform options aimed at preventing

severe recessions and periods of financial turmoil that are being discussed, and
bearing in mind that crises will inevitably recur, fall within three dimensions –
financial sector regulation, macroeconomic policy, and a global financial architec-
ture for stability. While the validity of many of the policy prescriptions and reform
efforts being discussed needs more analysis, we think that our work provides sup-
port for some of them. Preceding this recession, and as was the case before many
earlier recessions, there was a long period of high growth, low real interest rates,
and moderate real and financial volatility. While generally benign, some of these
elements breed ‘excessive’ optimism, which, in the presence of policy and regula-
tory deficiencies, lead to market failures.
The relationship between high growth periods and episodes of excessive opti-
mism is consistent with our finding that the higher the economic growth before the
recession, the greater the contraction during the recessionary phase. Our work thus
supports the notion that policy-makers need to be cognizant of growing vulnerabili-
ties during periods of high growth. This, in turn, points to the need to ensure that
macroeconomic policies take account of the build-up of systemic financial risks,
especially in housing markets, which are most clearly associated with the depth of a
recession. It also confirms the need for financial regulatory policies to be able to
assess the concentration of risk, and flawed incentive structures behind any real
and/or financial boom. In addition, the findings we report confirm the need to
adapt measures to help mitigate the procyclical effects of asset and credit booms.
7.2.3. Global policy coordination. Our finding that there is a high degree of
synchronicity in business and financial cycles across countries confirms the need for
reforms to the global architecture since it suggests that cycles can emerge from
common factors and cross-border spillovers. Importantly, we show that globally
synchronized recessions tend to be deeper and, thus, require global approaches.
Reforms will need to be ex-ante and ex-post type, that is, reforms to help prevent the
build-up of global risks in the expansionary phase of the cycle, and reforms to help
deal with the aftermath in the contractionary phase.
Reforms, such as improvements in international surveillance to detect growing
vulnerabilities and cross-country links, would help reduce global risks during the
expansionary phase of the cycle. Our data and findings could be a valuable input
to such an improved surveillance system in providing historical evidence that would
help to identify unsustainable patterns in real and financial variables, highlight cir-
cumstances conducive to recessions, and forecast their depth should they occur. In
addition to economic growth prior to a recession, and asset prices, the other factors
identified as being important in terms of the depth of a recession include the state
of the economy, global oil price dynamics, and export growth.
To avoid large spillovers during the contraction phase of the cycle, macro-
economic policies and structural reforms at global level will be needed. Clearly, fis-
cal and monetary policies will be more effective if coordinated globally. Our
analysis does not specifically address the global structural reforms that are needed,
but presumably they would include correcting for weaknesses in cross-border bank-
ing resolution and limits on liquidity provisions through which spillovers in financial
markets can occur.
7.3. Caveats and future research
While our broad cross-country study sheds much new light on the implications of
recessions, crunches, and busts, it must be accompanied by certain caveats. As this
is primarily an event study, no causal inferences are made (or intended) as to how
recessions come about, whether financial variables affect macroeconomic outcomes
or vice versa, and how policies affect economic and financial outcomes.
One important caveat to our analysis is the implication that initial conditions,
external developments in terms of both demand and supply, and policy responses
would help to predict the path of an economy during a recession. Although we
attempt to control for some of these factors in our preliminary regressions, our
analysis makes clear that more work is required to get a better grasp of the impor-
tant macroeconomic and financial linkages in order to be better informed about
how to adjust policies and institutional environments to lower the costs of reces-
sions, and to make better forecasts about the shape of economic outcomes.
For example, our analysis does not explore the channels through which financial
and real variables interact. As noted by a diverse set of theoretical studies, besides
general wealth and substitution effects, financial variables will impact on the bal-
ance sheets of financial institutions, firms and households, thereby affecting the
extension of credit and thus the performance of the real economy. While some
empirical work has been done on the importance of these channels in normal
times, little is known about how they operate in a recession. This points to an
exciting future research agenda. One approach that should shed more light on
these channels and how they operate, would be to use individual firm data for a
similarly large sample of countries. It would also be useful to focus on alternative
metrics for economic activity, such as various measures for the output gap, the dif-
ferent patterns in recessions associated with financial stress or crisis episodes, and
how various types of recessions interact with global and emerging market cycles.
Discussion
Gianmarco I.P. Ottaviano
Bocconi University and CEPR
This is a timely well-written paper. Its contribution is accurately placed into con-
text. The descriptive work is careful and references are up to date. On the other
hand, the scope of the paper is admittedly limited. Improving the regression analy-
sis and the discussion of policy implications should be part of the authors’ future
research agenda.
In terms of its strengths, the paper moves beyond the existing literature in at
least two respects. First, it details the interactions between recessions, credit
crunches, house and equity price busts for a large set of macroeconomic and finan-
cial variables for a sizeable number of countries over a long period of time. Second,
it provides some preliminary evidence suggesting that the change in house prices
during recessions appears to be an important factor influencing the ‘cost’ of reces-
sions.
Its weaknesses can be understood with respect to the authors’ statement of pur-
pose: ‘Our objective here is not to analyse the sources of business cycles, but is sim-
ply to correlate some financial factors to the cost of recessions’. There are two
obvious questions: Has this objective been achieved? Could/should one aim for
more?
As for achievement, the paper is best described as a good event study. Nonethe-
less, even within the limited scope of the paper, the regression analysis should have
been enriched. In particular, the ‘cost’ of recessions should have been explored, dis-
cussed and measured along additional dimensions. For example, while the descrip-
tive analysis is developed around the duration, amplitude and cumulative loss of
various variables, the regression analysis is restricted only to studying how the out-
put amplitude of recessions is ‘affected’ by financial variables. Moreover, when con-
sidered in some specification, the duration of recessions is introduced as a control
variable. But isn’t duration a component of the cost of recessions?
Turning to ambition, as a result of its self-limited scope, the paper tries to pro-
vide ‘policy lessons’ without causality analysis. This is honestly acknowledged by
the authors but dismissed as a final ‘caveat’ in the conclusions. However, the
dataset collected by the authors would have been rich enough to allow them to
push the analysis a bit further. For example, take the results on monetary and fiscal
policies: ‘while the measures of fiscal and monetary policies we consider do not
appear to have a significant impact on the depth of recessions, the inclusion of
these factors does not change our main results either’. This result is puzzling and
the authors do not provide much insight on what could explain it. This screams for
further investigation, possibly through alternative measures of monetary and policy
intervention.
Panel discussion
Silvana Tenreyro and David Thesmar began the discussion focusing on the varia-
tion in the shape and duration of the recoveries. Sylvana Tenreyro believed it was
important to analyse the co-movement of variables around the trough, something
which is not fully addressed in the paper.
Alessandro Turrini asked the authors to expand on the motivation for the vari-
ables they included in their model specifications as this is not evident in the paper.
He was interested in their interpretation of the insignificant financial crisis dummies
in explaining the recessions in their model. Fabrizio Perri commented that this was
a nice paper which redirected attention on how financial variables relate to real
business cycles in contrast to related papers over the last number of years which
have focused on the relationship between real variables and real business cycles.
Harold Hau believed the authors should place more emphasis in the paper on
their finding of a lack of association between equity market busts and recession. It
would help contribute to the current debate, particularly in Europe where many
hold the perception that there is a causal link between equity market busts on the
current recessions. Richard Portes added that the beginning of the current reces-
sions in the US and Euro area began in December 2007 and January 2008 respec-
tively. He believed it was hard to argue that the financial turmoil which began in
August 2007 was sufficient in itself to have caused the magnitude of this recession,
especially when compared to the financial turmoil in autumn 1998 which was far
greater.
Richard Portes drew the authors’ attention to the first and second declarations of
the Euro Area Business Cycle Committee which rejected the BBQ methodology
because it gives different results on business cycles compared to NBER results and
for the Euro area as a whole. Richard Portes also mentioned the use of unweighted
Euro area aggregate summary data in the paper gives the impression that the Euro
area is very unstable but explained that this is due to the substantial costs of the
Finnish recession. He added the Euro area countries are treated separately in the
paper but suggested they could be treated as a single entity from 1999 onwards
and statistics indicate there is currently no house price bust in the Euro area.
On the duration and shape of recoveries, Ayhan Kose noted they only examine
recessions in this paper. He added that in other work they have found it is not a
very straightforward process classifying the shape of recessions and recoveries
into L-shaped and V-shaped patterns when using quarterly data. In response to
Alessandro Turrini’s question, Ayhan Kose explained that the financial crises are
associated with sharp movements in assets prices and variation in asset prices is
much greater than the small number of financial crisis.
In anticipation of a discussion on the timing of the movement in financial market
and real variables, which was subsequently raised by Fabrizio Perri and Richard
Portes, Ayhan Kose provided some evidence which suggests the typical credit
crunch starts five quarters before the recession, a house price bust begins around
three quarters and an equity price bust begins around five quarters beforehand.
They find equity busts end around the same time as recessions, credit crunches per-
sist for two quarters while house prices last for nine quarters after the end of the
recession.
In response to Richard Portes’ comment on the dating of business cycles, Ayhan
Kose acknowledged the BBQ methodology has its limitations but pointed out that
the turning points are very close to NBER results.
Ayhan Kose agreed with Victor Gaspar’s comment that it was important to con-
sider previous episodes of booms and recessions and how they relate to structural
change and financial innovations. He believed this would help provide insight for
policy discussions.
Regarding questions on the paper’s policy conclusions, Stijn Claessen’s pointed
out that the paper does not necessarily prove policy implications but does show
areas of policy emphases such as financial restructuring and housing measures. As
they do not have specific measures of past policy action during similar events they
are unable to extrapolate.
APPENDIX: SOURCES AND DEFINITIONS OF VARIABLES
Variable Variable definition Source
Output OECD
Consumption Private final consumption expenditure, volume; OECD
1960:1–2007:4
Government Government final consumption expenditure, volume; OECD
consumption 1960:1–2007:4 (except Spain: 1961:1–2007:4)
Investment Gross fixed capital formation, volume; 1960:1–2007:4 OECD

Residential FCF Private residential fixed capital formulation, volume; OECD
1960:1–2007:4 (except Canada: 1961:1–2007:4,
France: 1963:1–2007:4, New Zealand:
1961:3–2007:4, Portugal: 1988:1–2007:4)
Non-residential Private non-residential fixed capital formulation, OECD
FCF volume; 1960:1–2007:4 (except Canada: 1961:
1–2007:4, France: 1963:1–2007:4, UK:
1962:1–2007:4, Denmark: 1971:1–2007:4,
New Zealand: 1961: 3–2007:4, Norway:
1962:1–2007:4, Portugal: 1988:1–2007:4,
Switzerland: 1961:1–2007:4)
Total FCF Private total fixed capital formulation, volume; 1 960: OECD
1 –2007:4 (except Canada: 1961 :1–2007:4,
Denmark: 1971:1–2007:4, France: 1963:1–2007:4,
New Zealand: 1961:3–2007:4, Norway: 1962:1–2007:4,
Portugal: 1977:1–2007:4, Spain: 1964:1–2007:4,
Switzerland: 1961:1–2007:4, UK: 1962:1–2007:4)
Industrial production Industrial production; 1960:1–2007:4 Generally, the IPS
coverage of industrial production indices comprises
mining and quarrying, manufacturing and electricity,
and gas and water, according to the UN International
Standard Industrial Classification (ISIC). For most
OECD countries, the data come from the OECD
database.
Exports Exports of good and services, volume; 1960:1–2007:4 OECD
Imports Imports of good and services, volume; 1960:1–2007:4 OECD
Net export-GDP ratio Net exports/GDP; 1960:1–2007:4 (except France: Both net
1963:1–2007:4) exports and
GDP are
from
OECD.
Current Account – Current account balances/GDP; 1 960: 1 –2007:4 (1) Current
GDP ratio (except Austria: 1970:1–2007:4, Belgium: 1975: account
1–2007:4, Denmark: 1988:1–2007:4, Finland: 1975: balances
1–2007:4, France: 1975:1–2007:4, Germany: 1971: are from
1–2007:4, Greece: 1975:1–2007:4, Ireland: 1975: OECD and
1–2007:4, Italy: 1971:1–2007:4, Japan: GDS; (2)
1968:1–2007:4, Netherlands: 1967:1–2007:4, GDP is
New Zealand: 1971:1–2007:4, Norway: from
1975:1–2007:1, Portugal: 1975:1–2007:4, OECD.
Spain: 1975:1–2007:4, Sweden: 1975:
1–2007:4, Switzerland: 1972:1–2007:4)
House prices Nominal house prices deflated using OECD and BIS (Austria,
CPI (BIS data only); 1970:1–2007:4 Belgium, Greece and Portugal)
(except Austria: 1986:3–2007:4,
Belgium: 1988:1–2007:4, Greece:
1993:4–2007:4, Portugal: 1988:
1–2007:4, Spain: 1971:1–2007:4)
Stock prices Share Price (Index) deflated using Both Share Price (Index) and
Consumer Price Index; 1960: Consumer Price Index are
1–2007:4 1960:1–2007:4 (except from IFS.
Denmark: 1970:1–2007:4, Greece:
1994:1–2007:4, New Zealand:
1961:1–2007:4, Portugal: 1988:1–2007:4,
Spain: 1961:1–2007:4)
Indices shown for Share Prices
generally relate to common shares of
companies traded on national or
foreign stock exchanges. All reported
indices are adjusted for changes in
quoted nominal capital of companies.
Indices are, in general, base-weighted
arithmatic averages with market
value of outstanding shares as
weights.
Real credit Nominal credit deflated using (1) Nominal credit is from IFS,
Consumer Price Index; 1960: Datastream and Haver; (2)
1–2007:4 (except Italy: 1970: Consumer Price Index is
1–2007:4, UK: 1963:1–2007:4, from IFS.
Spain:1962:1–2007:4, Sweden:
1969:4–2007:4, Switzerland: 1964:
1–2007:4)
Nominal credit from IFS is generally
titled ‘‘Claims on Private Sector’’,
‘‘Claims on Other Resident Sector’’,
etc. Nominal credit from Datasteam
is generally titled ‘‘Loans to Resident
Private Sector’’, ‘‘Lending to
Enterprises and Individuals’’, etc.
Short-term Treasury bill rate deflated using (1) Short-term nominal interest
real inflation rate; 1960:1–2007:4 rate is from IFS; (2) Inflation
interest rate Treasury Bill Rate is the rate at rate is the annual growth rate
which short–term securities are issued of CPI (from IFS).
or traded in the market. (except
Australia 1969:3–2007:4)
Long-term Government bond yield deflated using (1) Long-term nominal interest
real inflate rate; 1960:1–2007:4 rate is from IFS; (2) Inflation
interest rate Government Bond Yield refers to rate is the annual growth rate
one or more series representing yields of CPI (from IFS).
to maturity of government bonds or
other bonds that would indicate
longer-term rates. (except Austria
1970:1–2007:4, Finland 1970:
1–2007:4, Greece 1992:4–2007:4,
Spain 1970:1–2007:4)
Unemployment Unemployment rate; 1960:1–2007:4 OECD and WEO.

rate The unemployment rate is the ratio
of number of persons unemployed
to the number of persons in the
labour force. The labour force is the
sum of the numbers of persons
employed and unemployed. The
criteria for a person to be considered
as unemployed or employed are
defined by the ILO guidelines.
(except Australia 1964:1–2007:4,
Denmark 1966:1–2007:4, Greece
1985:1–2007:4, New Zealand 1978:
1–2007:4, Portugal 1980:1–2007:4,
Spain 1980:1–2007:4, Switzerland
1970:1–2007:4)
Inflation rate Inflation rate; 1960:1–2007:4 CPI is from IFS.
Inflation rate is calculated as
[CPI(quarter i, year t)/CPI(quarter i,
year t – 1)–1]*100, where i=1,2,3,4.
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e s

an We provide a comprehensive empirical characterization of the linkages between

— Stijn Claessens, M. Ayhan Kose and Marco E. Terrones

Economic Policy October 2009 Printed in Great Britain

What happens during

Stijn Claessens, M. Ayhan Kose and Marco E. Terrones

Economic Policy October 2009 pp. 653–700 Printed in Great Britain

Several empirical – both macro- and microeconomic – studies provide evidence

2. DATA AND METHODOLOGY

We constructed a comprehensive database of macroeconomic and financial vari-

We employ the algorithm introduced by Harding and Pagan (2002a), which

We further classify recessions based on the extent of decline in output. In partic-

Figure 1. Associations between recessions, crunches and busts (number of

Our algorithm replicates the dates of US business cycles as determined by the

3. RECESSIONS, CREDIT CONTRACTIONS AND ASSET PRICE DECLINES

3.1. Basic features of a recession: duration and cost

Country All recessions Severe recessions

Country All recessions Severe recessions

Duration and Amplitude: Full Period (1960:1-2007:4)

Figure 2. Recessions: duration and amplitude (share of total sample, percent)

3.2. Changes in macroeconomic and financial variables during recessions

Median values Mean values

Amplitude )1.87 –4.89*** )1.33 )2.63 )6.31*** )1.43

recession, consumption typically drops by more than 1%, compared to almost no

3.3. Dynamics of recessions

Figure 3. Dynamic of recessions (percentage change from a year earlier unless

Some macroeconomic variables naturally show signs of slowdown before the

indicator of economic activity as it typically begins to climb one quarter ahead of a

3.4. Synchronization of recessions, credit contractions and asset price

We next examine the synchronization of recessions, credit contractions and asset

Figure 4. Synchronization of recessions

Median values Mean values

All recessions Synchronized Other All recessions Synchronized Other

Figure 5. Synchronization of credit contractions and asset price declines

3.5. Credit contractions and asset price declines

A. Credit contractions 5.52 )4.08 )0.79 )1.77 0.05 0.48

4. WHAT HAPPENS DURING RECESSIONS ASSOCIATED WITH CRUNCHES

4.1. Leads and lags between recessions, crunches and busts

Median values Mean values

Median values Mean values

Without With With Without With With severe

4.2. Recessions associated with credit crunches

4.3. Recessions associated with house price busts

There are a number of statistically significant differences between recessions coincid-

Median values Mean values

4.4. Recessions associated with equity price busts

4.5. Recessions associated with crunches and busts: a comparison

Table 8. Recessions associated with crunches and busts: summary statistics

Events Durationa Amplitude Cumulative

A. Recessions without credit crunches 3.61 )1.76 )2.66

that the propensity to consume based on a $1 increase in housing wealth ranges

The average duration of a recession associated with a (severe) financial crisis

5. POLICY RESPONSES DURING RECESSIONS, CRUNCHES AND BUSTS

Table 9. Changes in policy variables (recessions, credit contractions and asset

Events Short-term Short-term Government

A. Recessions )0.79 )0.70 1.79

statistically significant. The only difference that is significant is government con-

6. RECESSION OUTCOMES AND FINANCIAL FACTORS

(1) (2) (3) (4) (5) (6)

Amplitude )1.87 –4.89* )1.33 )2.63 )6.31* )1.43

Credit 0.053 [0.037] – – )0.087 [0.036] )0.082 [0.035] )0.049 [0.042]