The duration and severity of recessions and the subsequent loss of potential growth

We set out to illustrate the idea that the more severe and lasting a recession, the greater the subsequent loss of potential growth. The mechanisms via which a recession reduces potential growth are well known: Loss of human capital if unemployment increases for a long time; Loss of productive capital due to corporate bankruptcies and the fall in investment; Deterioration in corporate balance sheets (capital losses, increase in debt) that then weakens investment and employment. We compare OECD countries during and after the 2008-2009 subprime crisis , looking at the link between the severity and duration of the crisis on the one hand and the subsequent fall in long-term growth on the other. We see that the size of the loss of GDP during the recession had little effect on the loss of potential growth after the recession, but that the duration of the recession had a significant effect on the loss of potential growth.