Gross domestic product won’t rebound to levels predicted before the Great Recession, researchers write in the latest
“We find that a large fraction of the gap between current GDP and its pre-crisis trend level is associated with the 2007-08 financial crisis, and conclude that GDP is unlikely to revert to the level implied by its trend before the crisis,” according to the Letter’s authors: Regis Barnichon, a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco; Christian Matthes, a senior economist in the Research Department of the Federal Reserve Bank of Richmond; and Alexander Ziegenbein, an assistant professor of economics at the University of Vienna.
Using a model that combines data on economic conditions with data on financial market conditions, the authors determined, “Without the large adverse financial shocks experienced in 2007 and 2008, the behavior of GDP would have been very different. It would most likely resemble the less severe 1991 recession, with GDP declining by only 1.5% and reverting to close to its pre-crisis trend level in a few years. This behavior is in stark contrast to actual GDP, which has not reverted to its pre-crisis trend level.”
Had the recession been mild, the model suggests the gap between output and potential output would “only be about 5 percentage points instead of the 12 percentage points observed today.” So, the authors say, “according to our estimates, the 2007-08 financial crisis persistently lowered output by roughly 7 percentage points. This is a large number: In dollar terms, it represents a lifetime income loss in present-discounted value terms of about $70,000 for every American.”
The researchers said, “the economy is unlikely to regain this large output loss and GDP is unlikely to revert to its previous trend level.”
They conclude, “[F]inding ways to prevent or contain future financial crises is an important research and policy priority.”
