The Effects of Banking Crises on Potential Output in OECD Countries

Simple time series models looking for the effect of financial crises on output generally find that they reduce the sustainable level of output permanently. However, not all crises are the same, with some being caused by recessions and others causing or preceding recessions. Using a common definition of crises in 13 OECD countries we look at the determinants of productivity per person hour, and include the possibility of a step down in the level of trend productivity around the time of crises. Although on average crises reduce output permanently by almost 3 per cent, it is not possible to impose a common effect across all crises. Only 3 of the 9 crises studied here have a significant permanent negative effect on output. We show, however that crisis related recessions are longer and deeper than non-crisis recessions.