Economic Shocks and Recovery, a Myth?

What happens to an economy's long run growth rate after it has been subjected to a severe external shock? Will trend output be regained or permanently lost? These are pretty fundamental questions regarding the economics of long run growth relative to short term volatility and shocks. A recent paper from the BIS takes  (get PDF here) on these questions and I am pretty sure this one is going to rattle a few cages around and about the economic roundtables.  Here is the abstract ...

Using panel data for a large number of countries, we find that economic contractions are not followed by offsetting fast recoveries. Trend output lost is not regained, on average. Wars, crises, and other negative shocks lead to absolute divergence and lower long-run growth, whereas we find absolute convergence in expansions. The output costs of political and financial crises are permanent on average, and long-term growth is negatively linked to volatility. These results also imply that panel data studies can help identify the sources of growth and that economic models should be capable of explaining growth and fluctuations within the same framework.

Moving on to the conclusion I think there are some notable things to take away. The first is the authors' proposition for further research in terms of how long term growth should be linked to volatility. Following from this is of course the point that financial and political crises have a tendency to exert real long term effects on growth (provided of course that you take the authors' conclusions for granted). And lastly, the authors also note some potential research (econometrical) implications in the sense that panel regressions which control for timing of shocks should work better than cross-sectional regressions. Now, all this has ticking for one specific reason and this is the conceptualization of shocks to the economy. In this case the authors' speak of course of the link between short term bursts of volatility and its effect on long term growth in the sense that recovery does not come as swiftly as expected. So, we need to look at economic shocks and their influence on economic growth? I can accept this and I can also accept that the authors in this case draws up a distinction between the short and long run (i.e. some kind of hysteresis effect) but what would happen for example if we were to look at ongoing and long term shocks to the economy in the form of for example the demographic transition? I mean, is this really so unreasonable now that we know pretty much for certain that the demographic transistion does not end and is a path dependant process (and yes, we do in fact know this). Of course we can always discuss whether to make the DT (or population structure) endogenous or exogenous to the actual production function. A shock in the economic sense would of course be considered exogenous by definition and I am not sure this would be the appropriate way to treat demographics but then again for countries currently venturing through the demographic transition I would argue that the way the DT exerts influence on the economy to some extent resembles a shock. So in the end, this study opens up an interesting discussion I think.