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Mr. Chris Papageorgiou, Mr. Andrew Berg, Ms. Catherine A Pattillo, and Mr. Nikola Spatafora
This paper investigates the medium- and long-term growth effects of the global financial crises on Low-Income Countries (LICs). Using several methodological approaches, including impulse response function analysis, growth spells techniques and panel regressions, we show that external demand (ED) shocks are not historically associated with sharp declines in output growth. Given existing evidence that LICs were primarily impacted by such a shock in the global financial crisis, our analysis provides some optimism on the chances that LICs will avoid a protracted period of slow growth. However, we also show that there seem to be persistent output losses associated with ED shocks in the medium-run. In terms of policy implications, our analysis provides evidence that countries with lower deficits, lower debt, more flexible exchange rate regimes, and a higher stock of international reserves are more likely to dampen the effects of an ED shock on growth.
Mr. Chris Papageorgiou, Mr. Andrew Berg, Ms. Catherine A Pattillo, and Mr. Nikola Spatafora

global crisis ( Figure 1 , bottom panel). TOT growth is defined as growth of terms of trade for goods while ED growth is defined as trade partner real GDP growth weighted by exports to all partner countries. 6 It is notable that, unlike in previous crises where TOT growth moved sharply downward relative to ED growth, in the current crisis it is ED that has resoundingly declined, while TOT growth continued at around the historical average rate. This transmission channel is also highlighted in IMF (2009a) and more formal growth regression analysis in Berg et al

Mr. Chris Papageorgiou, Mr. Andrew Berg, Ms. Catherine A Pattillo, and Mr. Nikola Spatafora
Rupa Duttagupta and Mr. Paul Cashin
This paper uses a Binary Classification Tree (BCT) model to analyze banking crises in 50 emerging market and developing countries during 1990-2005. The BCT identifies key indicators and their threshold values at which vulnerability to banking crisis increases. The three conditions identified as crisis-prone-(i) very high inflation, (ii) highly dollarized bank deposits combined with nominal depreciation or low liquidity, and (iii) low bank profitability-highlight that foreign currency risk, poor financial soundness, and macroeconomic instability are key vulnerabilities triggering banking crises. The main results survive under alternative robustness checks, confirming the importance of the BCT approach for monitoring banking system vulnerabilities.
Rupa Duttagupta and Mr. Paul Cashin

); external vulnerability (official foreign exchange reserve (FX) cover of broad money, export growth, and terms of trade (TOT) growth); monetary conditions (credit growth, real deposit rate, foreign interest rate, existence of explicit deposit insurance, and de facto exchange rate regime); and banking sector health (liability dollarization in banks given by FX deposits in total official FX reserves, net FX open position, bank liquidity, equity strength, asset quality, and two proxies for bank profitability). The baseline model identifies the following five candidate

International Monetary Fund

, and also limits the fiscal space needed to resolve a relatively nonsystemic banking problem. External liquidity : (i) Growth of exports of goods and services; (ii) terms of trade (TOT) growth; and (iii) official reserve cover of broad money. Export and TOT growth influence economic growth and hence banking system performance. Also, if banks intermediate credit to exporters, poor export performance can adversely affect banks even if overall economic growth is unaffected. The level of official foreign reserves measures the extent to which banking crises occur due to

Mr. Nicolas E Magud and Samuel Pienknagura

-of-trade (ToT) growth, changes in the real effective exchange rate (REER), government debt as a share of GDP, and government expenditure as a share of GDP. 6 Z f,t includes a set of lagged firm-level variables commonly used in the literature, such as sales growth, the liability-asset ratio (long-term debt plus current liabilities, divided by total assets; that is, a measure of the firm’s leverage), the cash flow to assets ratio (net income plus depreciation and depletion within the year, normalized by total assets at the beginning of the year), the logarithm of total

Mr. Nicolas E Magud and Samuel Pienknagura
We study the response of corporate investment in Emerging Markets to unexpected fiscal shocks. We find that, although firm-level investment decreases on impact following unexpected public expenditure adjustments (classical Keynesian multiplier effect), it quickly rises above pre-shock levels. The rebound in investment is facilitated by fiscal space, flexible exchange rates, and more predictable fiscal policy. We also show that the composition of fiscal adjustments matters for investment’s response—compared to public investment adjustments, reductions in public consumption lead to larger private investment contractions on impact, but drive private investment to above pre-shock levels. Finally, we exploit firm-level heterogeneity in several dimensions, including to show that corporate investment’s recovery is stronger in firms in the tradable sector and in larger and less indebted firms, and to show that the long-run benefits to economic activity of the fiscal shock appear to outweigh its short-run costs.