Implications of the Financial Crisis for Potential Growth: Past, Present, and Future

35 Pages Posted: 1 Dec 2009

Date Written: November 1, 2009

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.

Keywords: potential growth, financial sector

JEL Classification: E01, O47, N12

Suggested Citation

Steindel, Charles, Implications of the Financial Crisis for Potential Growth: Past, Present, and Future (November 1, 2009). FRB of New York Staff Report No. 408, Available at SSRN: https://ssrn.com/abstract=1515795 or http://dx.doi.org/10.2139/ssrn.1515795

Charles Steindel (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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