## V.2 Effects of banking crises and epidemics

The effects of banking crises on the growth of TFP, investment, and employment tended to be short-lived (figures 10.D-F and 11.A-F). Five years after the average banking crisis, neither investment growth nor employment growth were statistically significantly lower than otherwise; only TFP growth was still significantly lower. Epidemics were associated, even five years later, with statistically significantly lower TFP growth, investment growth, and—in contrast to recessions and banking crises—potential labor supply growth. The effect of epidemics on investment growth after five years was somewhat stronger, and the effect on TFP growth weaker, than the effects of recessions (figures 10.D-F).

Banking crises had larger long-term adverse effects on TFP growth, investment growth, and employment growth in advanced economies than EMDEs, possibly reflecting the larger role of finance in, and greater financial development of, advanced economies. Conversely, epidemics had larger long-term adverse effects on these variables in EMDEs than in advanced economies, in part perhaps because EMDE governments and central banks had less policy room to dampen the economic effects of epidemic disruptions (figures 11.A-F).

# VI. Conclusions

Potential growth, the growth an economy can generate at full employment and full capacity, is critical for a sustained increase in living standards. It also anchors the calibration of macroeconomic policies. This study introduced the most comprehensive international database of potential growth, including the nine most widely used measures of potential growth for up to 173 countries over 1981-2021. At the global level, all measures point to a steady decline in potential growth in the past decade. This decline was internationally widespread, with potential growth in 2011-21 falling below its 200010 average in 70 percent of countries. The decline in potential growth between 2000-10 and 2011-21 was almost as large in advanced economies (0.8 percentage point per year) as in EMDEs (1.0 percentage point per year).

The study also presented an application of the new database by studying the effects of recessions and other adverse events on potential growth. Recessions, on average, have been followed, even five years later, by a drop of 1.4 percentage points in potential growth. The magnitude of this estimated decline varies somewhat among the possible measures of potential growth, but it is virtually always statistically significant. This lasting effect of recessions operates through the many channels: Four to five years after recessions, investment growth, productivity growth, and employment growth all remained statistically significantly lower. In addition, this study compared the effects of recessions with those of other adverse events, such as banking crises and epidemics. The long-term effect of recessions was somewhat deeper than that of banking crises and more broadbased than that of epidemics.

Understanding the behavior of potential growth is of fundamental importance to shortand long-run macroeconomic analyses and policy formulation. The new database will facilitate future research on a number of topics related to potential growth.

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