Real Output Costs of Financial Crises: A Loss Distribution Approach

TL;DR

This paper applies a Loss Distribution Approach to quantify the probability and severity of GDP losses from financial crises across countries, highlighting heterogeneity and the impact of different crisis types.

Contribution

It introduces a multi-country loss distribution model for financial crises, providing insights into the probability and magnitude of extreme global GDP losses.

Findings

Currency crises cause smaller output losses than debt and banking crises.

Extreme crises with 1% annual probability lead to 2.95%-4.54% GDP losses.

Financial crises exhibit strong heterogeneity in output losses.

Abstract

We study cross-country GDP losses due to financial crises in terms of frequency (number of loss events per period) and severity (loss per occurrence). We perform the Loss Distribution Approach (LDA) to estimate a multi-country aggregate GDP loss probability density function and the percentiles associated to extreme events due to financial crises. We find that output losses arising from financial crises are strongly heterogeneous and that currency crises lead to smaller output losses than debt and banking crises. Extreme global financial crises episodes, occurring with a one percent probability every five years, lead to losses between 2.95% and 4.54% of world GDP.