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

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  • Nicholas Oulton
  • María Sebastiá-Barriel

Abstract

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

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File URL: http://eprints.lse.ac.uk/48926/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 48926.

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Length: 55 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:ehl:lserod:48926

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Keywords: productivity; financial; banking crisis; recession;

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References

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  1. Faccini, Renato & Hackworth, Christopher, 2010. "Changes in output, employment and wages during recessions in the United Kingdom," Bank of England Quarterly Bulletin, Bank of England, vol. 50(1), pages 43-50.
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  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.
  5. Dan Ben-David & Robin L. Lumsdaine & David H. Papell, 2003. "Unit roots, postwar slowdowns and long-run growth: Evidence from two structural breaks," Empirical Economics, Springer, Springer, vol. 28(2), pages 303-319, 04.
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  7. Barnes, Sebastian & Price, Simon & Sebastia Barriel, Maria, 2008. "The elasticity of substitution: evidence from a UK firm-level data set," Bank of England working papers 348, Bank of England.
  8. 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.
  9. 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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  13. Hughes, Abigail & Saleheen, Jumana, 2012. "UK labour productivity since the onset of the crisis — an international and historical perspective," Bank of England Quarterly Bulletin, Bank of England, vol. 52(2), pages 138-146.
  14. Davide Furceri & Annabelle Mourougane, 2009. "The Effect of Financial Crises on Potential Output: New Empirical Evidence from OECD Countries," OECD Economics Department Working Papers 699, OECD Publishing.
  15. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers, Princeton, Department of Economics - Econometric Research Program 338, Princeton, Department of Economics - Econometric Research Program.
  16. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, Econometric Society, vol. 49(6), pages 1417-26, November.
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Cited by:
  1. Mehdi Hosseinkouchack & Maik Wolters, 2012. "Do large recessions reduce output permanently?," Kiel Working Papers 1815, Kiel Institute for the World Economy.
  2. 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.
  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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