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Mr. Axel Schimmelpfennig, Ms. Selma Mahfouz, and Mr. Richard Hemming

Front Matter Page Fiscal Affairs Department Contents I. Introduction II. Review of Theory and Evidence III. New Empirical Work A. Definitions and Data B. Recession Episodes and Fiscal Response C. Descriptive Analysis of Depth of Recession D. Regression Analysis of Fiscal Response and Depth of Recession E. Measuring Fiscal Policy IV. Concluding Comments References Charts 1. Recession Episodes in Advanced Economies, 1971–98 2. Frequency Distribution for Fiscal Multiplier 3. Fiscal Response, Depth of Recession, and

Mr. Prakash Kannan
Recoveries from recessions associated with a financial crisis tend to be sluggish. In this paper, we present evidence that stressed credit conditions are an important factor constraining the pace of recovery. In particular, using industry-level data, we find that industries relying more on external finance grow more slowly than other industries during recoveries from recessions associated with financial crises. Additional tests, based on establishment size, on alternative definitions of financial crises, and on corporate-government interest rate spreads, support the findings. Moreover, for subsets of industries where financial frictions are more severe, we find much stronger differential growth effects.