The answer is no. Surprising isn’t it?
In this paper Luc Laeven and Fabien Valencia compare the crisis management of both advance and emerging/developing economies. They show emerging economies have a better track record than their developed counterparts when it comes to crisis management.
They have a post in voxeu as well summarising the paper. I gave the paper a miss for its unattractive title (Systemic Banking Crises Database: An Update) but now looks like a must read.
While conventional wisdom would have it that advanced economies with their stronger macroeconomic frameworks and institutional setting would have an edge in crisis resolution, the record thus far supports the opposite: advanced economies have been slow to resolve banking crises, with the average crisis lasting about twice as long as in developing and emerging market economies (Table 1).
The reason for this inferior performance is adv ecos using macro policies for stabilization:
While differences in initial shocks and financial system size surely contribute to these different outcomes, in a recent working paper (Laeven and Valencia 2012), we suggest that the greater reliance by advanced economies on macroeconomic policies as crisis management tools may delay financial restructuring, with the risk of prolonging the crisis. We refer to this as the ‘curse’ of advanced economies.
This is not to say that macroeconomic policies should not be used to support the broader economy during a crisis. Macroeconomic policies should be the first line of defence. They stimulate aggregate demand and sustain asset prices, thus supporting output and employment, and indirectly a country’s financial system. This helps prevent a disorderly deleveraging and gives way for balance sheet repair, buying time to address solvency problems head on. However, by masking balance sheet problems of financial institutions, they may also reduce incentives for financial restructuring, with the risk of dampening growth and prolonging the crisis. A similar point is made in BIS (2012).
Even in this crisis, mon pol was the first line of action:
Indeed, crisis responses to date in advanced economies have favoured accommodative monetary and fiscal policy, with the increase in public debt and monetary expansion amounting to about 21% and 8% of GDP, respectively – compared with about 10% and 1% of GDP, respectively, in developing and emerging market economies (see Table 1 below). In this context, monetary expansion, measured as the percentage increase in reserve money, should not be understood narrowly as conventional monetary policy, but also as capturing central bank liquidity support and unconventional measures to the extent that they increase reserve money.
Advanced economies are generally well placed to resort to macroeconomic policies to manage crises without being overly concerned about their impact on the exchange rate, inflation, or public debt. Advanced economies benefit from well-anchored inflation expectations and reserve currencies benefit from flight to quality effects during financial crises. Emerging market economies, on the other hand, may not have the fiscal space or the access to finance to support accommodative fiscal policy, while excessive monetary expansion can quickly translate into inflation and large decreases in the value of the currency, impairing balance sheets further in the presence of currency mismatches.
However, these policies shift trouble to future:
Taken together, these actions have mitigated the financial turmoil and contained the crisis. But it means that the bulk of the cost of this crisis has simply been transferred to the future, in the form of higher public debt and possibly a dampened economic recovery due to residual uncertainty about the health of banks and continued high private sector indebtedness. While monetary policy has avoided an even sharper contraction in economic activity, it has also discouraged more active bank restructuring. The lingering bad assets and uncertainty about the health of financial institutions risk prolonging the crisis and depressing growth for a prolonged period of time. Macroeconomic stabilisation policies should supplement and support, not displace financial restructuring.
The authors nicely call it an advanced economy curse. In case you think the adv eco did not have any curses to live with, here is one..
Superb..
