Lessons from the great recession for developing countries

Many lessons can be taken from the Great Recession and the Euro crisis with respect to both pre-crisis and post-crisis policies. Appropriate measures can reduce the risk of crisis in individual countries, the severity of crises, and the magnitude of needed adjustments. These include an appropriate exchange rate policy (flexibility is highly desirable), ensuring the soundness of the financial system, not allowing expansion of credit at too high a rate, adopting structural fiscal budgeting policies, and avoiding dangerous sovereign debt build-up. On the crisis resolution side, the lesson that stands out is the desirability of decisive and credible action to address the causes of the crisis. The issues that arise when the banking and financial system is weakened in the run-up to crisis are extremely difficult, especially when sovereign debt is unsustainable. Therefore, while the important lesson is to avoid overly expansive credit build-up during good times, in the event of a crisis, it is important that the health of the banks be restored as quickly as possible and that a viable supervision and resolution framework be put in place.