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The Statistical Behavior of GDP after Financial Crises and Severe Recessions

1University of Houston

2University of Houston

*This paper was presented at the Federal Reserve Bank of Boston conference on “Long-Term Effects of the Great Recession,” October 18-19, 2011. We thank our discussants, Jeremy Piger and James Stock, for their comments. Correspondence to: David Papell, tel. (713) 743-3807, email: dpapell@uh.edu, Department of Economics, University of Houston, Houston, TX 77204-5019 Ruxandra Prodan, tel. (713) 743-3836, email: rprodan@uh.edu, Department of Economics, University of Houston, Houston, TX 77204-5019

Citation Information: . Volume 12, Issue 3, ISSN (Online) 1935-1690, DOI: 10.1515/1935-1690.101, October 2012

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Do severe recessions associated with financial crises cause permanent reductions in potential GDP? 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 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 for the United States, severe and milder financial crises for advanced economies, severe financial crises for emerging markets, and postwar recessions for the United States 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:Q4 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

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