Towards More Resilient Economies: The role of well-functioning economic structures

Abstract:

Economic resilience is essential to better withstand adverse shocks and reduce the economic costs associated with them. We propose different measures of resilience and empirically gauge how countries differ in their shock absorption capacity, while controlling for the quality of their economic structures. The paper finds robust evidence that sound labour and product markets, framework conditions and political institutions increase resilience to adverse shocks and reduce the incidence of crisis more generally.

In the presence of a common shock, a country with weaker economic structures can, on average, suffer up to twice the output loss in a given year compared to a country with sound institutional parameters.

Similarly, the likelihood of a severe economic crisis is reduced significantly if a country exhibits flexible and adaptable institutions. The proposed measures can be used to establish a governance process towards more resilient economic structures, as suggested for the euro area in the so-called Five Presidents’ Report.