Credit Spreads and the Severity of Financial Crises

We study the behavior of credit spreads and their link to economic growth during nancial crises. Our main \u85nding is that the recessions that surround \u85nancial crises are longer and deeper than the recessions surrounding non-\u85nancial crises. The slow recovery from the 2008 crisis is in keeping with historical experience of recoveries from nancial crises. We reach this conclusion by examining the relation between credit spreads and economic growth in the cross-section, across many countries and crisis-events. This cross-sectional approach di¤ers from much of the existing literature, which instead studies the average GDP performance in countries for a set of speci\u85ed crisis dates. We argue that the cross-sectional approach avoids some important shortcomings in existing studies