## The Economic Scars of Crises and Recessions _IMF Blog, March 21, 2018_ ## Source details **Canonical URL:** [The Economic Scars of Crises and Recessions](https://www.imf.org/en/blogs/articles/2018/03/21/the-economic-scars-of-crises-and-recessions) ## Other formats - [Markdown version](/en/blogs/articles/2018/03/21/the-economic-scars-of-crises-and-recessions/index.md) - [Structured JSON version](/en/blogs/articles/2018/03/21/the-economic-scars-of-crises-and-recessions/index.json) - [Bundle manifest](/en/blogs/articles/2018/03/21/the-economic-scars-of-crises-and-recessions/bundle-manifest.json) ## Bibliographic details - Authors: Valerie Cerra, Sweta C Saxena - Published: March 21, 2018 --- ### Key findings - 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. ### Challenging the traditional business cycle view - 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.” ### Long-term development consequences - 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. ### Revisiting the output gap and measurement implications - 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). ### Policy implications and recommendations - Be more conservative in forecasting growth after recessions. - Avoid using output gap measures that are misleading and inconsistent over time. - Economic policy priorities: - focus on preventing crises and severe recessions - respond to crises with appropriate stimulus and safety nets - implement sustainable economic policies and financial regulation that contain excessive risk-taking as first-best options - if those are insufficient, central banks should include financial stability risks in their analysis and decisions - foreign exchange reserves can help insure against losses due to external shocks *Source: The Economic Scars of Crises and Recessions — Valerie Cerra, Sweta C. Saxena; March 21, 2018.* --- ## Content in this bundle - **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)](/external/japanese/np/blog/2018/032118j.pdf.md){rel="alternate" type="text/markdown"} - [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)](/external/japanese/np/blog/2018/032118j.pdf){rel="external" type="application/pdf"} - **As cicatrizes econômicas das crises e recessões** - [As cicatrizes econômicas das crises e recessões (Markdown version)](/external/lang/portuguese/np/blog/2018/032118p.pdf.md){rel="alternate" type="text/markdown"} - [As cicatrizes econômicas das crises e recessões (PDF)](/external/lang/portuguese/np/blog/2018/032118p.pdf){rel="external" type="application/pdf"} --- ## References - [https://www.imf.org/wp-content/uploads/2018/03/BLOG-1024x600-CRISES-and-RECESSIONS-iStock-503640774.jpg](https://www.imf.org/wp-content/uploads/2018/03/BLOG-1024x600-CRISES-and-RECESSIONS-iStock-503640774.jpg) - [new study](https://www.imf.org/en/Publications/WP/Issues/2017/11/16/Booms-Crises-and-Recoveries-A-New-Paradigm-of-the-Business-Cycle-and-its-Policy-Implications-45368) - [verge of strong growth](https://blogs.imf.org/2018/01/22/the-current-economic-sweet-spot-is-not-the-new-normal/) - [our earlier findings](https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Growth-Dynamics-The-Myth-of-Economic-Recovery-18392) - [https://www.imf.org/wp-content/uploads/2018/03/eng-march-9-economic-scars1-3.jpg](https://www.imf.org/wp-content/uploads/2018/03/eng-march-9-economic-scars1-3.jpg) - [https://www.imf.org/wp-content/uploads/2018/03/eng-march-9-economic-scars3-1.jpg](https://www.imf.org/wp-content/uploads/2018/03/eng-march-9-economic-scars3-1.jpg) - [https://www.imf.org/wp-content/uploads/2018/03/eng-march-9-economic-scars2-3.jpg](https://www.imf.org/wp-content/uploads/2018/03/eng-march-9-economic-scars2-3.jpg) _Source: https://www.imf.org/en/blogs/articles/2018/03/21/the-economic-scars-of-crises-and-recessions_