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Potential Output and Recessions: Are We Fooling Ourselves?

Robert Martin (), Teyanna Munyan and Beth Anne Wilson
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Beth Anne Wilson: https://www.federalreserve.gov/econres/beth-anne-wilson.htm

No 1145, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper studies the impact of recessions on the longer-run level of output using data on 23 advanced economies over the past 40 years. We find that severe recessions have a sustained and sizable negative impact on the level of output. This sustained decline in output raises questions about the underlying properties of output and how we model trend output or potential around recessions. We find little support for the view that output rises faster than trend immediately following recessions to close the output gap. Indeed, we find little evidence that growth is faster following recessions than before; if anything post-trough growth is slower. Instead, we find that output gaps close importantly through downward revisions to potential output rather than through rapid post-recession growth. The revisions are made slowly (over years)--a process that leads to an initial underestimation of the effect of recessions on potential output and a corresponding under-prediction of inflation.

Keywords: business fluctuations; cycles; general macro; international business cycles (search for similar items in EconPapers)
JEL-codes: E20 E32 F44 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2015-09-11
New Economics Papers: this item is included in nep-fdg and nep-mac
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http://www.federalreserve.gov/econresdata/ifdp/2015/files/ifdp1145.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/IFDP.2015.1145 http://dx.doi.org/10.17016/IFDP.2015.1145 (application/pdf)

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Working Paper: Potential Output and Recessions: Are We Fooling Ourselves? (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1145

DOI: 10.17016/IFDP.2015.1145

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