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Implications of the financial crisis for potential growth: past, present, and future

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  • Charles Steindel

Abstract

The scale of the recent collapse in asset values and the magnitude of the recession suggest that activities connected to the increase in values over the 2002-07 period--notably, expansion of the financial markets, homebuilding, and real estate--were overstated. If this is true, aggregate U.S. economic growth would have been overstated, implying that previous rates of potential gross domestic product (GDP) growth may also have been overstated and that the trajectory of potential GDP may be slower going forward. Slowing growth in the finance, homebuilding, and real estate sectors could hold back aggregate growth. A detailed examination of these sectors' direct contributions to GDP, however, suggests that overstatements of past growth would likely not have made a large difference in recorded GDP growth. Slower growth in these sectors would have, at most, a moderate direct effect on aggregate economic activity. The recent experience's longer term effects on GDP would seem to stem largely from factors other than the retrenchment in these sectors.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 408.

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Date of creation: 2009
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Handle: RePEc:fip:fednsr:408

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Keywords: Gross domestic product ; Financial crises ; Economic conditions ; Construction industry ; Financial services industry ; Real estate development;

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References

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  1. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA.
  2. Dennis J Fixler & Marshall B Reinsdorf & Shaunda Villones, 2010. "Measuring the services of commercial banks in the NIPA," IFC Bulletins chapters, in: Bank for International Settlements (ed.), The IFC's contribution to the 57th ISI Session, Durban, August 2009, volume 33, pages 346-349 Bank for International Settlements.
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Cited by:
  1. Jane Haltmaier, 2012. "Do recessions affect potential output?," International Finance Discussion Papers 1066, Board of Governors of the Federal Reserve System (U.S.).
  2. Costa Cabral, Nazare, 2010. "Breve guia temático e bibliográfico sobre o estudo da actual crise financeira e económica
    [Short thematic guide to the study of current financial and economic crisis]
    ," MPRA Paper 20743, University Library of Munich, Germany.
  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. Burgess, Stephen, 2011. "Measuring financial sector output and its contribution to UK GDP," Bank of England Quarterly Bulletin, Bank of England, vol. 51(3), pages 234-246.
  5. Charles, Steindel, 2010. "The Financial Crisis and the Measurement of Financial Sector Activity," MPRA Paper 27240, University Library of Munich, Germany.

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