Crisis, potential output and hysteresis

This paper seeks to estimate the effects of financial crises on potential output accounting for hysteresis on a panel of 34 OECD economies. Hysteresis amplifies the effect of financial crises on potential output. The difference is marginal in the first years (below 0.5% point) but grows over time to about 1/3 after six years. These results are robust to a range of specifications. On average across crisis and country the maximum crisis effect on potential output is about 3%. The effect appears to be more severe for the 2008 crisis though, with a maximum impact above 4% on average for G7 countries. Lastly, the empirical work undertaken in this paper suggests that financial crises have had on average an effect on potential growth in the first years following the crisis but not after.