This paper, authored by Valerie Cerra and Sweta Chaman Saxena from the Monetary and Economic Department of the Bank for International Settlements, examines the dynamics of economic growth and the impact of economic contractions on long-term output levels. Using panel data from a large number of countries, the authors find that economic contractions are not followed by rapid and offsetting recoveries. They conclude that trend output lost is not regained on average, and that wars, crises, and other negative shocks lead to absolute divergence and lower long-run growth. The paper also highlights that the output costs of political and financial crises are permanent, and that long-term growth is negatively linked to volatility. The findings suggest that panel data studies can help identify the sources of growth and that economic models should be capable of explaining both growth and fluctuations within the same framework. The paper further explores the impact of different types of shocks on recovery, the role of crises in diverging incomes across countries, and the potential sources of economic contractions.This paper, authored by Valerie Cerra and Sweta Chaman Saxena from the Monetary and Economic Department of the Bank for International Settlements, examines the dynamics of economic growth and the impact of economic contractions on long-term output levels. Using panel data from a large number of countries, the authors find that economic contractions are not followed by rapid and offsetting recoveries. They conclude that trend output lost is not regained on average, and that wars, crises, and other negative shocks lead to absolute divergence and lower long-run growth. The paper also highlights that the output costs of political and financial crises are permanent, and that long-term growth is negatively linked to volatility. The findings suggest that panel data studies can help identify the sources of growth and that economic models should be capable of explaining both growth and fluctuations within the same framework. The paper further explores the impact of different types of shocks on recovery, the role of crises in diverging incomes across countries, and the potential sources of economic contractions.