Studies of previous financial crises provide one helpful place to start.2 This literature has found that severe financial crises – particularly those associated with housing booms and busts – have often been associated with many years of subsequent weak performance.
While this result allows for many interpretations, one possibility is that financial crises, or the deep recessions that typically accompany them, may reduce an economy’s potential growth rate, at least for a time. The accumulating evidence does appear consistent with the financial crisis and the associated recession having reduced the potential growth rate of our economy somewhat during the past few years.