Output Loss from the Banking Crisis in Cyprus

This article provides estimates of output losses of the banking crisis in Cyprus for the period 2012-2020. Unlike most studies, where the effects of banking crises are computed ex post using actual data, the crisis in Cyprus is still evolving and thus the output losses and the period over which the economy will be below its potential output are not known. The analysis is, therefore, conducted on the basis of the output gap approach, where projected replaces actual output in the comparison with potential output. Furthermore, we provide alternative output loss estimates to account for the uncertainty about the magnitude and the duration of the recession. Our results show that the crisis can be very costly in terms of lost output/income and growth.