Article
Journal of Macroeconomics

Are Crises Good for Long-term Growth? The Role of Political Institutions

By: Alberto Cavallo and Eduardo Cavallo

Format:Print

Abstract

This paper provides empirical evidence for the importance of institutions in determining the outcome of crises on long-term growth. We show that once unobserved country-specific effects and other sources of endogeneity are accounted for, political institutions affect growth through their interaction with crises. In particular, we find that the effect of a crisis on long-run growth is conditioned by the prevailing institutional environment. In countries with democratic institutions, the negative effect of crises is mitigated, while in countries with autocratic institutions, the negative effect is exacerbated.