business cycle trough to the trough, with a trough defined as a year in which output growth is both negative and at least one standard deviation below its long-term (19952020) average (as in Huidrom, Kose, and Ohnsorge 2016). This definition yields up to 124 recessions in 37 advanced economies and up to 351 recessions in 101 EMDEs during 19802020.

Almost half of such recessions at the country level occurred during global recession years (1975, 1982, 1991, 2009, 2020; figure 7.A). Recessions at the country level, on average, lasted 1.5 years and were associated with a contraction in actual output of 4.0 percent, on average (figure 7.B). In advanced economies, recessions were, on average, somewhat less severe than in EMDEs (with drops of 3.5 percent and 4.3 percent, respectively; figures 7.C and D). The duration of recessions was similar, at 1.5 years, in the two country groups.

A local projection method (LPM) is employed to estimate the evolution of potential growth following recessions (annex E). The model estimates the cumulative effect of recessions on potential growth, following Jordà (2005) and Teulings and Zubanov (2014). In impulse responses, the model estimates the effect of short-term shocks (the recession, banking crisis, or epidemic event) over a horizon h on potential growth while controlling for other determinants: yi,t+h – yi,t = α h + β hshocki,t + γ h ∆ yi,t-1 + fixed effectsi + ε i,t , where yi,t is potential growth. The model controls for country-fixed effects to capture timeinvariant cross-country differences. The variable shocki,t is a dummy variable for a recession event (or banking crisis or epidemic), the main variable of interest. Lagged potential growth yi,t-1 controls for the history of potential growth.

# IV.2 Results

Long-term effect of recessions. Even five years after recessions, potential growth as measured by the production function approach is estimated, on average, to have been 1.4 percentage points lower than if a recession had not occurred (figure 8.A). Coefficient estimates for the recession dummy are statistically significantly negative for the first five years after a recession. The effect was somewhat stronger and more persistent for EMDEs, with 1.6 percentage points lower potential growth five years after a recession compared to 1.3 percentage points for advanced economies (figures 8.B.C).

These results are broadly robust to the choice of potential growth measure and the definition of recessions. Four to five years after recessions, potential growth as measured by most methods other than the production function approach is estimated to have been 0.2-1.3 percentage points lower than if a recession had not occurred (annex E).<sup>8</sup> Recessions could alternatively be defined as years of negative output growth, regardless

> 8 The only exceptions are, for advanced economies, forecast-based estimates from the IMF World Economic Outlook database and, for EMDEs, multivariate filters and Hodrick-Prescott-filtered estimates. One possible reason for the unresponsiveness of some forecast-based measures might be that forecasters’ perception of long-term growth is stickier for advanced economies than for EMDEs.

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