http://www.palgrave-journals.com/ces/journal/v53/n3/full/ces20115a.htmlComparative Economic Studies (2011) 53, 383406. doi:10.1057/ces.2011.5; published online 24 March 2011Crisis and Growth in the Advanced Economies: What We Know, What We Do not, and What We Can Learn from the 1930sBarry Eichengreen11University of California, Evans Hall 508, CA 94708 Berkeley, USA. E-mail: eichengr@econ.berkeley.eduTop of pageAbstractThis paper addresses the question of whether the medium- and long-term growth potential of the advanced economies has been impaired by the global financial crisis. It evidence from the Great Despression of the 1930s to illuminate the prospects, concluding the following. First, the impact of weak bank balance sheets and heightened risk aversion made it harder for small firms. in particular, to fund investment projects. Second, there is little evidence that increased public debt or policy uncertainity had major effects in depressing investment. Third, structural unemployment dissolved quickly in the face of increased demand. Fourth and finally, the crisis was also an opportunity as firms used the downtime created by the Depression to reorganize and modernize their operations.Keywords: economic growth; crisis; output losses; bank leading; productivityJEL Classifications: N10Top of pageINTRODUCTIONAs this paper is drafted, it has become commonplace to observe that there is a high degree of uncertainty about the course of the economy. Those making this observation are typically concerned with the high level of uncertainty surrounding the short-term growth prospects of the advanced economies: whether the expansion now underway will continue or be interrupted by a double dip. I would like to suggest that a comparably high degree of uncertainty surrounds the question of whether the medium- and long-term growth potential of the advanced economies has been impaired. This uncertainty arises for three reasons.First, experience in other recent recessions is of dubious relevance to the current episode. Typically, studies of this question have looked at the trend rate of growth and its determinants before and after a set of banking crisis dates. The crises considered are heterogeneous: while some are as serious as the recent episode, others are considerably less so.1 Financial crises also differ in how effectively they are resolved; growth experience following the Swedish crisis of the early 1990s, in the wake of which damage to the banking system was repaired relatively quickly, is unlikely to tell us much about the medium-term effects of the current crisis. Whereas the crises considered are, with few exceptions, idiosyncratic national events, the recent crisis infected the entire OECD; thus, the opportunity for individual countries to export their way out of domestic difficulties did not arise to anywhere near the same extent in the recent episode. Where previous studies look at growth performance in the wake of banking crises, the recent episode is more than just a crisis for the banking system. It affected the shadow banking system and securitization markets at the same time it affected the banks, and in some cases it affected them even more powerfully.Second, empirical work focusing on aggregate effects is inconclusive and unconvincing. Estimating what has happened to the trend rate of growth as a result of a crisis presupposes an ability to estimate the trend. This is something on