Effects of financial crises on productivity, capital and employment

We examine the hypothesis that capacity can be permanently damaged by financial, particularly banking, crises. A model which allows a financial crisis to have both a short-run effect on the growth rate of labor productivity and a long-run effect on its level is estimated on 61 countries over 1954–2010. A banking crisis as defined by Reinhart and Rogoff reduces the long-run level of GDP per worker, and also that of capital per worker, by on average 1.1 percent, for each year that the crisis lasts; it also reduces the TFP level by 0.8%. The long run, negative effect on the level of GDP per capita, 1.8 percent, is substantially larger. So there is also a hit to employment. The effects on labor productivity, capital and TFP are larger in developing than in developed countries; the opposite is the case for employment.