"We find a strong link between pre-crisis domestic financial factors (fast private credit growth) and external imbalances (current account deficits) on the one hand and the decline in the growth rate of output and especially domestic demand during the crisis on the other hand. Real-side variables such as trade openness and the manufacturing share are also correlated with the output and demand declines, consistently with the higher cyclicality of manufactured goods and the dramatic decline in international trade that took place during the crisis, but the conditional correlations are not always significant. The ‘advanced economies nature’ of the crisis is highlighted by the negative correlation between GDP per capita and the decline in output growth. We also find some evidence that countries with pegged exchange regimes experienced weaker output growth during the crisis."
High GDP per capita, large manufacturing sector, and a pegged exchange rate increase the depth of economic contractions in the wake of financial crises.
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