The Economic Scars of Crises and Recessions

IMF Blog, March 21, 2018

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All types of recessions — including those arising from external shocks and small domestic macroeconomic policy mistakes — lead to permanent losses in output and welfare.
Using updated data from 1974 to 2012, the study confirms earlier findings that irreparable damage to output is not limited to financial and political crises.
Historical magnitudes of persistent output losses reported in an earlier 2008 paper for a sample of 190 countries:
- balance of payments crises: 5 percent persistent loss in output
- banking crises: 10 percent persistent loss in output
- twin crises: 15 percent persistent loss in output
Countries do not typically experience growth booms before crises and recessions, contrary to conventional wisdom.

Traditional view: recessions are temporary deviations below a long-term trend, followed by a fast rebound to the pre-recession trend.
New evidence: recovery consists of a return of growth to its long-term expansion rate without a high-growth rebound back to the initial trend — implying permanent economic scarring.
Implication: shocks to growth can cause permanent shifts in the trend of output, blurring the distinction between actual and potential output and challenging the concept of a business “cycle.”

Poor countries fall further behind rich countries because they suffer deeper and more frequent recessions and crises, each causing permanent output losses and cumulative loss of ground.
The new model explains why convergence predicted by traditional theory (that poor countries should catch up) has not occurred in historical data.

Potential output is traditionally conceived as the long-term trend; the output gap is the deviation of actual output from potential output.
If growth shocks permanently shift trend output, estimating potential output by smoothing actual output:
- creates false cycles
- leads to constant revisions in potential output estimates
Example: there has been a constant downward revision in the estimated path of potential output for the United States and a closing of the output gap in recent years; in practice, potential GDP estimates were revised down to actual GDP rather than actual GDP rising to potential.
Including years of lower output after the crisis mechanically reduces measured potential GDP, dramatically changing historical assessments (e.g., producing a very positive output gap for most advanced countries on the brink of the crisis in 2007, despite no signs of overheating at the time).

Source: The Economic Scars of Crises and Recessions — Valerie Cerra, Sweta C. Saxena; March 21, 2018.

危機と不況が経済に残す傷跡; ヴァレリー・セラスウェタ・サクセナ; IMF ブログ 2018年3月21日掲載
- 危機と不況が経済に残す傷跡; ヴァレリー・セラスウェタ・サクセナ; IMF ブログ 2018年3月21日掲載 (Markdown version)
- 危機と不況が経済に残す傷跡; ヴァレリー・セラスウェタ・サクセナ; IMF ブログ 2018年3月21日掲載 (PDF)
As cicatrizes econômicas das crises e recessões
- As cicatrizes econômicas das crises e recessões (Markdown version)
- As cicatrizes econômicas das crises e recessões (PDF)