The Federal Reserve Board eagle logo links to Board's home page

International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Do Recessions Affect Potential Output?
Jane Haltmaier
2012-1066  (December 2012)

Abstract:  A number of previous studies have looked at the effect of financial crises on actual output several years beyond the crisis. The purpose of this paper is to examine whether the growth of potential output also is affected by recessions, whether or not they include financial crises. Trend per capita output growth is calculated using HP filters, and average growth is compared for the two years preceding a recession, the two years immediately following a recession peak, and the two years after that. Panel regressions are run to determine whether characteristics of recessions, including depth, length, extent to which they are synchronized across countries, and whether or not they include a financial crisis, can explain the cumulative four-year loss in the level of potential output following an output peak preceding a recession. The main result is that the depth of a recession has a significant effect on the loss of potential for advanced countries, while the length is important for emerging markets. These results imply that the Great Recession might have resulted in declines in trend output growth averaging about 3 percent for the advanced economies, but appear to have had little effect on emerging market trend growth.

Full paper (257 KB PDF)

Growth, potential, cycles

PDF files: Adobe Acrobat Reader   ZIP files: PKWARE

Home | IFDPs | List of 2012 IFDPs
Accessibility | Contact Us
Last update: December 5, 2013