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Recessions and potential GDP: The case of Mexico

Daniel Ventosa‐Santaulària, Luis G. Hernández‐Román and Alejandro Villagómez Amezcua
Authors registered in the RePEc Author Service: Daniel Ventosa-Santaulària ()

Bulletin of Economic Research, 2021, vol. 73, issue 2, 179-195

Abstract: There is growing evidence that deep recessions may have a permanent and negative impact on both the level and growth rate of the actual and potential GDP of developed economies in the medium and long term. We study the growth rate of the potential GDP of Mexico, a middle‐income economy, using a modified version of the methodology proposed by Ball (2014) that employs robust time‐series techniques to identify shifts and accounts for a diminishing growth rate caused by secular forces rather than crises. We find evidence in favour of the growth rate's being stable around a changing mean. On the one hand, the 1982 debt crisis and 2000 recession coincide with structural changes in the Mexican economy that had a lasting impact (on growth) and permanently lowered potential GDP levels, i.e., strong evidence in favour of the hysteresis hypothesis. On the other, we find no significant damaging effect (on potential GDP) of either the 1995 financial crisis or the Great Recession.

Date: 2021
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