Wednesday, July 2, 2014

The Long Term Damage From Deep Recessions

Moderate recessions are a part of what economists call the business cycle.  Economies normally recover from recessions without suffering any longer term economic damage.  This time it might be different.  This paper provides data from OECD countries which indicates that the damage from the Great Recession may be more serious.  It argues that the recession has decreased the potential output as well as the growth rate of potential output in many OECD nations.  It also makes an effort to describe the channels by which the potential output has been seriously damaged. 

This article suggests that the damage to potential output is partially explained by public policy decisions.  It shows a positive relationship between the degree of austerity and the decline in potential output.  The damage may not be irreversible.

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