Distributional Effects of Crises: The Financial Channel

Who pays for financial crises? What are the mechanisms for spreading the cost across different social groups? The literature is only beginning to provide answers to these crucial questions. Several papers measure the depth and duration of crises, defined as the cumulative output loss and recovery time, and conclude that these crises have been very costly for developed and emerging economies. The period 1973-97 registered more than forty-four crises in developed countries and ninety-five in emerging markets, with average output losses of 6.25 percent and 9.21 percent of gross domestic product (GDP), respectively.