Crises Do Not Cause Lower Short-Term Growth

TL;DR

This paper challenges the common belief that financial crises cause lower short-term growth, demonstrating through a novel causal model that crises often do not have a causal impact on GDP growth, and mainly serve as informational signals for policymakers.

Contribution

It introduces a two-stage staggered difference-in-differences model to distinguish causal effects of crises from predictive correlations, revealing that crises often lack causal impact on growth.

Findings

Cross-sectional crises often do not cause lower growth.

Crisis residuals mainly provide informational value.

Causal inference differs from predictive models.

Abstract

It is commonly believed that financial crises "lead to" lower growth of a country during the two-year recession period, which can be reflected by their post-crisis GDP growth. However, by contrasting a causal model with a standard prediction model, this paper argues that such a belief is non-causal. To make causal inferences, we design a two-stage staggered difference-in-differences model to estimate the average treatment effects. Interpreting the residuals as the contribution of each crisis to the treatment effects, we astonishingly conclude that cross-sectional crises are often limited to providing relevant causal information to policymakers.