Revisiting the New Normal Hypothesis

The paper estimates the impact of crises on output growth and augments Cerra and Saxena’s (2008) analysis by extending the data until 2010, and by taking into account globalization and contagion effects. The paper finds that the decline in output growth rates following currency, banking and stock market crises are much larger in the sample ending in 2010, than in the one ending in 2001. The results are robust across different specifications, including by factor augmenting the panel through the extraction of principal components from the output growth to account for globalization, and by using various crises databases. In addition, the paper finds that globalization has benefitted economic growth in the long run, but those gains have been diminishing in the new millennium. Moreover, globalization also amplifies the negative effects of crises, especially for upper middle and high income OECD countries also starting with the new millenium. As such, lower output growth is to be expected as the new norm, especially in advanced economies for a lot longer than what would have been expected in the usual cyclical recovery, confirming El-Erian and PIMCO’s (2009) statement on a ”new normal”. Finally, the factor augmenting panel also allows us to show in a new way that there are thresholds effects of finance and globalization on growth.