Our starting point is the real0life situation of a policymaker aiming to identify and collect economic data, evaluate competing models of the intensity of financial crisis, and make policy decisions with a view to preventing and mitigating financial crises. The policymaker may be interpreted as either the IMF or the World Bank aiming to determine which crisis indicators to employ in their new role of assessing financial vulnerability. The tools available are a set of multiple, overlapping theories of financial crises emphasizing different channels (e.g., foreign exchange liquidity, bad banks) and a large set of economic data that encompasses potentially useful indicators of crisis shocks and channels, but may be costly to collect. In this context, it seems sensible for the policymaker to extract useful crisis indicators from the data by imposing priors based on the literature, choosing indicators that explain the intensity of historical financial crises, and paying the costs of collecting these data. Uncertainty over which policy to recommend follows from a number of sources of uncertainty, including theory and measurement uncertainty. In this study we assume that the policy maker wants to evaluate policies unconditionally with respect to a potentially large number of alternate models of financial crisis intensity.
The assessment of post crisis dynamics involves estimation of the intensity of a crisis in terms of its impact on the real sector. Intensity can be thought of as the distance that the economy travels from the pre0crisis equilibrium measured along the output dimension. This definition is useful for policy because governments care most about the welfare costs of financial crises, and welfare costs have a higher correlation with real GDP than with financial sector indicators. In addition, accurate financial indicators of crisis intensity are problematic, especially indicators meant to capture aggregate bank distress. Empirically, crisis intensity is gauged by the change in real GDP relative to the precrisis trend, conditional on the occurrence of a crisis.
This paper aims at analyzing the impact of Employment Protection Legislation (EPL) on firms’ investment decisions in the presence of financial imperfections. To our knowledge there are not many papers that investigate the joint influence of imperfect financial and labour markets on investment. Exceptions are Belke and Fehn (2000), Rendon (2004), Wasmer and Weil (2002), and Calcagnini and Saltari (2003, 2005).
In 2008, the ‘credit crunch’ progressed from financial crisis to global economic recession, its impact spreading from the US housing market to western financial markets and, by the end of the year, to most nations and sectors of the international economy. Its origins in the highly technical character of the ‘toxic’ products spawned in the financial world of intermediation and risk management has informed a hesitant and, in turn, managerial analysis of causality. This hesitancy was reflected in the statements expressed by politicians and business leaders throughout much of 2008 as they oscillated between inaction and reaction and expressed fears, in turn, about the crisis realising uncontrollable inflationary or deflationary trends.
For much of 2008, American and British politicians and business leaders were anxious to downplay the problems created by the credit crisis until the financial world reached the brink of collapse. The UK government, spent much of the year in denial about the weakness of the British economy- it was sound in its essentials - blaming US and wider international developments for the position the UK economy is in while the US government dithered over a bailout plan which was initially designed to buy up all the worthless, toxic assets of the finance sector but eventually took the form of buying shares in US banks.
