Global Shocks, Institutional Development, and Trade Restrictions: What Can We Learn from Crises and Recoveries Between 1990 and 2022?

The Global Financial Crisis and the COVID-19 pandemic were two major shocks to the world economy in the 21st century. In this study, we analyze the patterns of recessions and recoveries of 101 advanced and developing economies. We identify the turning points of recessions and expansions between 1990 and 2022, and perform cross-country analysis of domestic and external drivers of economic recovery. In addition to the standard independent variables, we include institutional development, political stability, the extent of democracy, and trade restrictions indexes, and explore their roles in explaining recessions and recovery patterns. For the whole sample, we find that deeper recessions are followed by stronger recoveries, in line with Friedman’s plucking model of the business cycle. However, the empirical evidence for the plucking model becomes weaker if institutional development is limited and trade restrictions are high. We show that recessions that create conflict and trade tensions differ sharply from those that do not, a highly relevant finding in the current global climate of heightened trade tensions and geopolitical uncertainty. Finally, since developing countries tend to have weaker institutions and higher trade barriers, our evidence suggests that if policy-makers seek to cushion global shocks, they will need to rely on countercyclical monetary and fiscal policy. Implementation of such policies is generally facilitated by robust and credible monetary and fiscal policy frameworks.