How do institutions affect output recovery after financial crises?

Abstract

This study examines whether a country’s institutional quality can affect its output recovery after the recessions caused by financial crises. Utilizing a sample of 66 countries that experienced various financial crises during the period 1985–2010, we find that the quality of government institutions is negatively associated with the duration of recovery as well as the depth and severity of output losses during recessions. The results remained valid even after accounting for potential endogeneity. Moreover, institutional quality’s ability to improve output recovery is more pronounced for countries with the largest output losses, when coupled with an expansionary monetary policy, in emerging economies, during banking and sovereign debt crises, and in the 1990s.