The effects of currency crises on the long-run growth
One sentence summary: Between 1980-2000, the countries that have experienced at least one currency crisis between 1980-1990 have grown 40% less than the countries that have experienced no currency crisis.
The corresponding paper by Hakan Yilmazkuday has been published at Applied Economics Letters.
The working paper version is available here.
Abstract
We attempt to analyze the effects of the currency crises on the long-run growth by using a cross-sectional country data set. After controlling for the post-crisis period, we find that the effects of the currency crises on the long-run growth are strictly negative and significant. We also find that the negative effects of the currency crises on the long-run growth increase as the number of the currency crises increases.
Non-technical Summary
An almost standard empirical framework is running cross-section regressions for studying growth among countries. According to this approach, the base line growth equations include a standard set of explanatory variables that provide robust and widely accepted proxies for growth determinants. In this paper, by using a cross-country analysis, we attempt to find the effects of currency crises on the long-run growth. After controlling for the post-crisis period, we find that the currency crises have long-run effects on growth.
The standard specification of the growth equation regresses the rate of real per capita GDP growth on the (log) initial real GDP and a (log) measure of the initial school enrollment rate. While the former has an expected negative sign due to real convergence, the latter is used as a proxy for human capital investment and enters with an expected positive sign. In our analysis, we use three different school enrollment rates: the total secondary school enrollment (TSEC), the full secondary school enrollment (FSEC), and the average years of schools (AVSCH).
In addition to these traditional variables, we include dummy variables into our regression in order to capture the effects of the currency crises on growth. Our data set includes 47 countries over the period 1980–2000. Besides the countries that have experienced no currency crisis over the period 1980-2000, for the countries that have experienced currency crises, we include only the countries that have experienced at least one currency crisis over the period 1980-1990 and have experienced no currency crisis over the period 1991-2000. By this way, we control for the post-crisis period by considering the period that is necessary for a country to recover from a currency crisis.
In growth regressions, we include one dummy variable for the countries that have experienced no currency crisis between 1980 and 1990, and it takes the value of 1 if the country has experienced no currency crisis and 0 otherwise. Another dummy variable is for the countries that have experienced at least one currency crisis between 1980 and 1990, and it takes the value of 1 if the country has experienced at least one currency crisis and 0 otherwise.
The results based on the sample period of 1980-2000 show that when the (log) initial TSEC is used as a measure of the human capital investment, the countries that have experienced at least one currency crisis between 1980-1990 have grown 40% less than the countries that have experienced no currency crisis. This 40% difference corresponds to 1.62% in annual terms.
Our results are robust to the selection of the human capital investment in the sense that when we use the (log) initial FSEC as our measure, the negative effect of the currency crisis on the long-run growth is around 42%, which corresponds to around 1.68% in annual terms; and when we use the (log) initial AVSCH as our measure, the negative effect of the currency crisis on the long-run growth is again around 42%, which corresponds to around 1.68% in annual terms.
A further investigation shows that the negative effects of the currency crises on the long-run growth increase as the number of the currency crises increases.