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Long and short-term effects of the financial crisis on labour productivity, capital and output

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  • Oulton, Nicholas

    ()
    (Bank of England)

  • Sebastia-Barriel, Maria

    ()
    (Bank of England)

Abstract

The behaviour of labour productivity in the United Kingdom since the onset of the recession in early 2008 constitutes a puzzle. Over four years after the recession began labour productivity is still below its previous peak level. This paper considers the hypothesis that economic capacity can be permanently damaged by financial crises. A model which allows a financial crisis to have both a short-run effect on the growth rate of labour productivity and a long-run effect on its level is estimated on a panel of 61 countries over 1955-2010. The main finding is that a banking crisis as defined by Reinhart and Rogoff on average reduces the short-run growth rate of labour productivity by between 0.6% and 0.7% per year and the long-run level by between 0.84% and 1.1% (depending on the method of estimation), for each year that the crisis lasts. A banking crisis also reduces the long-run level of capital per worker by an average of about 1%. The corresponding effect on GDP per capita is about double the effect on GDP per worker since there is a long-run, negative effect on the employment ratio.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 470.

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Length: 55 pages
Date of creation: 24 Jan 2013
Date of revision:
Handle: RePEc:boe:boeewp:0470

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Keywords: productivity; financial; banking crisis; recession;

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  1. Reinhart, Carmen & Rogoff, Kenneth, 2010. "Growth in a Time of Debt," CEPR Discussion Papers 7661, C.E.P.R. Discussion Papers.
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  3. Furceri, Davide & Mourougane, Annabelle, 2012. "The effect of financial crises on potential output: New empirical evidence from OECD countries," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 822-832.
  4. Jordà, Òscar & Schularick, Moritz & Taylor, Alan M., 2011. "When Credit Bites Back: Leverage, Business Cycles, and Crises," CEPR Discussion Papers 8678, C.E.P.R. Discussion Papers.
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  7. M. Hashem Pesaran, 2004. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," CESifo Working Paper Series 1331, CESifo Group Munich.
  8. Mauro Giorgio Marrano & Jonathan Haskel & Gavin Wallis, 2009. "What Happened To The Knowledge Economy? Ict, Intangible Investment, And Britain'S Productivity Record Revisited," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 55(3), pages 686-716, 09.
  9. Carol Corrado & Charles Hulten & Daniel Sichel, 2009. "Intangible Capital And U.S. Economic Growth," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 55(3), pages 661-685, 09.
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  12. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
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  15. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
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Cited by:
  1. Roland Döhrn & Philipp an de Meulen & Daniela Grozea-Helmenstein & Tobias Kitlinski & Torsten Schmidt & Simeon Vosen, 2013. "Die wirtschaftliche Entwicklung im Ausland: Zögerliche Erholung der Weltwirtschaft," RWI Konjunkturbericht, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, pages 36, 03.
  2. Hosseinkouchack, Mehdi & Wolters, Maik H., 2012. "Do large recessions reduce output permanently?," Economics Working Papers 2012-16, Christian-Albrechts-University of Kiel, Department of Economics.
  3. Millard, Stephen & Nicolae, Anamaria, 2014. "The effect of the financial crisis on TFP growth: a general equilibrium approach," Bank of England working papers 502, Bank of England.

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