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The Statistical Behavior of GDP after Financial Crises and Severe Recessions

34 Pages Posted: 5 Oct 2011 Last revised: 6 Oct 2011

David H. Papell

University of Houston - Department of Economics

Ruxandra Prodan

University of Houston - Department of Economics

Date Written: October 5, 2011

Abstract

Do severe recessions associated with financial crises cause permanent reductions in potential GDP, or does the economy return to its trend? If the economy eventually returns to its trend, does the return take longer than the return following recessions not associated with financial crises? We develop a statistical methodology that is appropriate for identifying and analyzing slumps, episodes that combine a contraction and an expansion, and end when the economy returns to its trend growth rate. We analyze the Great Depression of the 1930s for the U.S., severe and milder financial crises for advanced economics, severe financial crises for emerging markets, and postwar recessions for the U.S. and other advanced economies. The preponderance of evidence for episodes comparable with the current U.S. slump is that, while potential GDP is eventually restored, the slumps last an average of nine years. If this historical pattern holds, the Great Recession that started in 2007:4 will not ultimately affect potential GDP, but the Great Slump is not yet half over.

Keywords: Great Recession, Second Great Contraction, Great Slump, Structural Change

JEL Classification: C22, E32

Suggested Citation

Papell, David H. and Prodan, Ruxandra, The Statistical Behavior of GDP after Financial Crises and Severe Recessions (October 5, 2011). Available at SSRN: https://ssrn.com/abstract=1933988 or http://dx.doi.org/10.2139/ssrn.1933988

David H. Papell

University of Houston - Department of Economics ( email )

Houston, TX 77204-5882
United States

Ruxandra Prodan (Contact Author)

University of Houston - Department of Economics ( email )

Houston, TX 77204
United States

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