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Comparative Economic Studies

, Volume 61, Issue 4, pp 625–635 | Cite as

The Fall in Potential Output due to the Financial Crisis: A Much Bigger Estimate for the UK

  • Nicholas CraftsEmail author
Article

Abstract

Conventional estimates suggest that the 2007–2009 financial crisis reduced UK potential output by 3.8–7.5% of GDP. This implied a need for fiscal tightening as the structural budget deficit had increased considerably. The austerity that followed led to the rise of UKIP, the EU referendum and the vote for Brexit. Brexit will reduce potential output by somewhere between 3.9 and 8.7% of GDP. Thus, it can be argued that the total fall in UK potential output due to the banking crisis is between 7.7 and 16.2% of GDP—approximately double the conventional estimate.

Keywords

Austerity Brexit Financial crisis Potential output 

JEL Classification

F15 G01 H12 O47 

Notes

Acknowledgements

I am grateful to Nauro Campos and two anonymous referees for comments which significantly improved an earlier draft of this paper. I have also benefited from helpful discussions with Sascha Becker, Graham Hacche and Marcus Miller. I am responsible for any errors or omissions.

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Copyright information

© Association for Comparative Economic Studies 2019

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of WarwickCoventryUK

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