The Aftermath of Financial Crises

The Aftermath of Financial Crises The paper written by Rigors and Reinhardt entitled “The Aftermath of a Financial Crisis” talks about what advanced economies have in common with emerging markets when it comes to financial crisis. According to their studies both the antecedents and the aftermath of a banking crisis in rich countries and emerging markets have a lot in common. They found the equity and housing prices, unemployment, and government revenues and debt have a similar pattern in both spectrums.

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In comparing the recent financial crisis in the U. S. With crisis in other 18 plopped economies, they noticed that the aftermath of the financial crisis in all of them shared three common characteristics. The first one is that the asset market falls deep, causing housing prices to drop an average of 35 percent and equity prices 55 percent. The second characteristic is associated with declines in output and employment.

In average the unemployment rate rises 7 percent and output decreases over 9 percent. Lastly, the third characteristic highlighted by Rigors and Reinhardt is that the real value of government debt tends to explode, rising an average f 86 percent in the major post-World War II episodes. Next, Rigors and Reinhardt show us a series of charts that compares the depth and duration of the crisis in different countries.

These charts include decline in house price, decline in equity price, percent increase in unemployment rate, percent decline in real GAP and the respective duration in years, and Cumulative increase in real public debt in the three years following the banking crisis. All of these chart show that the financial crisis in the U. S. Was severe in any metric and any of these subjects.

After a throughout explanation of the numbers presented in the charts and how each of them relate to the economic market in which they happened, Rigors and Reinhardt conclude by saying that due to a less rigid global exchange regime, monetary policies that we have nowadays are much more flexible than the ones we use to have for example in the sass during the Great Depression. They finally state that the analysis presented in this document for unemployment, output and government debt will provide a solid forecast for how that financial crisis would continue to unfold.

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