| Summary: | This paper estimates potential output losses from the global financial crisis by comparing recent OECD published projections with a counter-factual assuming a continuation of pre-crisis productivity trends and a trend employment rate which is sensitive to demographic trends. Among the 19 OECD countries which experienced a banking crisis over the period 2007-11, the median loss in potential output in 2014 is estimated to be 3¾ per cent, compared to 2¾ per cent among all OECD countries. The crisis hit does, however, vary widely across countries, being more than 10% for several smaller European, mainly euro area, countries. The largest adverse effects come from lower trend productivity, which is a combination of both lower total factor productivity and lower capital per worker. Despite large increases in structural unemployment in some countries, the contribution of lower potential employment to the crisis hit is limited because the adverse effect on labour force participation is generally much less than might have been expected on the basis of previous severe downturns. This may partly reflect pension reforms and a tightening up of early retirement pathways. Pre-crisis conditions relating to over-heating and financial excesses, including high inflation, high investment, large current account deficits, low real interest rates, high total economy indebtedness and more rapid growth in capital-per-worker are all correlated with larger post-crisis potential output losses. This suggests that underlying the potential output losses was a substantial misallocation of resources, especially of capital, in the pre-crisis boom period. On the other hand, more competition-friendly product market regulation is associated with smaller crisis-related losses of potential output, suggesting it facilitates a reallocation of resources across firms and sectors in the aftermath of an adverse shock and so helps to mitigate its consequences
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