34 Pages Posted: 5 Oct 2011 Last revised: 6 Oct 2011
Date Written: October 5, 2011
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: 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