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Business Cycle Accounting East and West: Asian Finance and the Investment Wedge

Author

Listed:
  • Dooyeon Cho

    (Korea Institute for International Economic Policy)

  • Antonio Doblas-Madrid

    (Michigan State University)

Abstract

While a large literature studies the causes of financial crises, little is known about the mechanisms by which crises lead to output drops. We perform an exploratory analysis of output drops by applying the Business Cycle Accounting (BCA) methodology developed by Chari et al. (2007) to a sample of 23 crises. The BCA procedure estimates the wedges, and thus the kinds of distortions, that are most relevant in explaining output movements in each episode. Our results make a case for separating East Asian crises, which are mostly driven by the efficiency and investment wedges, from crises elsewhere, which are mostly driven by the efficiency and labor wedges. These findings are consistent and complementary with studies of Asian financial systems, which highlight the influence of Japanese institutions and practices, including relationship-based as opposed to market-based lending, and reluctance to impose bankruptcy. (Copyright: Elsevier)

Suggested Citation

  • Dooyeon Cho & Antonio Doblas-Madrid, 2013. "Business Cycle Accounting East and West: Asian Finance and the Investment Wedge," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 724-744, October.
    • Handle: RePEc:red:issued:10-51
    DOI: 10.1016/j.red.2012.10.003
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    More about this item

    Keywords

    Business cycle accounting; Financial crises; Output drops; Recoveries;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G01 - Financial Economics - - General - - - Financial Crises
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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