Growth Dynamics: The Myth of Economic Recovery

IMF Working Papers, July 1, 2005

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Using panel data for a large number of countries, the authors find that economic contractions are not followed by offsetting fast recoveries.
"Trend output lost is not regained, on average."
Wars, crises, and other negative shocks lead to absolute divergence and lower long-run growth.
The authors find absolute convergence in expansions.
"The output costs of political and financial crises are permanent on average and long-term growth is negatively linked to volatility."
These results imply that panel data studies can help identify the sources of growth.

Negative shocks (wars, crises, other shocks) produce persistent, non-recovered losses in output rather than temporary dips followed by rapid catch-up.
Expansions exhibit absolute convergence, indicating recoveries in expansion episodes behave differently from contractions.
Volatility is negatively linked to long-term growth, reinforcing the importance of stability for sustained growth.

Economic models should be capable of explaining growth and fluctuations within the same framework.
Panel data approaches are useful for distinguishing sources of growth and the asymmetric effects of contractions versus expansions.

"Using panel data for a large number of countries, we find that economic contractions are not followed by offsetting fast recoveries."
"Trend output lost is not regained, on average."
"Wars, crises, and other negative shocks lead to absolute divergence and lower long-run growth, whereas we find absolute convergence in expansions."
"The output costs of political and financial crises are permanent on average and long-term growth is negatively linked to volatility."

Sweta Chaman Saxena and Valerie Cerra, July 1, 2005 — Growth Dynamics: The Myth of Economic Recovery (IMF Working Paper).