Financial Crises: Explanations, Types, and Implications; by Stijn Claessens and M. Ayhan Kose; imf working Paper 13/28; January 1, 2013

B.   Financial Effects of Crises 

Crises are associated with large downward corrections in financial variables. A large research 

program has analyzed the evolution of financial variables around crises. Some of the studies 

in this literature focus on crises episodes using the dates identified in other work, others 

consider the behavior of the financial variables during periods of disruptions, including credit 

crunches, house and equity price busts. Although results differ across the types of crises, both 

credit and asset prices tend to decline or grow at much lower rates during crises and 

disruptions than they do during tranquil periods, confirming the boom-bust cycles in these 

variables discussed in previous sections. In a large sample of advanced countries (Figure 8), 

credit declines by about 7 percent, house prices fall by about 12 percent and equity prices 

drop by more than 15 percent during credit crunches, house and equity price busts, 

respectively (Claessens, Kose and Terrones, 2011). Asset prices (exchange rates, equity and 

house prices) and credit around crises exhibit qualitatively similar properties in terms of their 

                                                 

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 Reinhart and Rogoff (2011) provide further statistical analysis of the linkages between debt and 

banking crises.

 

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 Of course, this and other analyses can suffer from reverse causality. That is, private agents see 

events that lead them to predict future drops in a country’s output, and as a result, these agents pull 

their capital from the country. In this view, anticipated output drops drive sudden stops, rather than 

the reverse. While possible and reasonable, is hard to document or refute quantitatively this view. 

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temporal evolution in advanced and emerging market countries, but the duration and 

amplitude of declines tend to be larger for the latter than for the former.  

 

The most notable drag on the real economy from a financial crisis is the lack of credit from 

banks and other financial institutions. Dell’Ariccia, Detragiache, Rajan (2005) and 

Klingebiel, Laeven and Kroszner (2007) show how after banking crises, sectors grow slower 

that naturally need more external financing, likely because banks are impaired in their 

lending capacity. Recoveries in aggregate output and its components following recessions 

associated with credit crunches tend to take place before the revival of credit growth and 

turnaround in house prices (Figure 9). These temporal patterns are similar to those in the case 

of house price busts, i.e., economic recoveries start before house prices bottom out during 

recessions coinciding with sharp drops in house prices. 

 

Both advanced and emerging market countries have experienced the phenomenon of 

"creditless recoveries". Creditless recoveries are quite common to financial crises associated 

with sudden-stops in many emerging market economies (Calvo, Izquierdo and Talvi, 2006). 

Abiad, Dell’Ariccia, and Li (2013) using a large sample of countries, show that about one out 

of five recoveries is creditless. Creditless recoveries are, as expected, more common after 

banking crises and credit booms. The average GDP growth during these episodes is about a 

third lower than during “normal” recoveries.

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 Furthermore, sectors more dependent on 

external finance grow relatively less and more financially dependent activities (such as 

investment) are curtailed more (see also Kannan (2009)). Micro evidence for individual 

countries also shows that financial crises are associated with reductions in investment, R&D 

and employment, and firms passing up on growth opportunities (Campello, Graham, and 

Harvey, 2010 review evidence for the U.S.). Collectively, this suggests that the supply of 

credit following a financial crisis can constrain economic growth.