Macroeconomic Crises since 1870

Abstract

We build on the Maddison GDP data to assemble international time series from before 1914 on real per capita personal consumer expenditure, C. We also improve the GDP data in many cases. The C variable comes closer than GDP to the consumption concept that enters into usual asset-pricing equations. We have essentially full annual data on C for 24 countries and GDP for 36 countries. For samples that start as early as 1870, we apply a peak-to-trough method for each country to isolate economic crises, defined as cumulative declines in C or GDP by at least 10%. The principal world economic crises ranked by importance are World War II, World War I and the Great Depression, the early 1920s (possibly reflecting the influenza epidemic of 1918-20), and post-World War II events such as the Latin-American debt crisis and the Asian financial crisis. We find 95 crises for C and 152 for GDP, implying disaster probabilities around 3-1/2% per year. The disaster size has a mean of 21-22% and an average duration of 3-1/2 years. A comparison of C and GDP declines shows roughly coincident timing. The average fractional decline in C exceeds that in GDP during wartime crises but is similar for non-war crises. We simulate a Lucas-tree model with i.i.d. growth shocks and Epstein-Zin-Weil preferences. This simulation accords with the observed average equity premium of around 7% on levered equity, using a "reasonable" coefficient of relative risk aversion of 3.5. This result is robust to a number of perturbations, except for limiting the sample to non-war crises, a selection that eliminates most of the largest declines in C and GDP.

Can Time‐Varying Risk of Rare Disasters Explain Aggregate Stock Market Volatility?

“…Specifically, Barro and Ursua (2009) address the question: given a large decline in the stock market, how much more likely is a decline in consumption than otherwise? Barro and Ursua augment the data set of Barro and Ursua (2008) with data on national stock markets. They look at cumulative multiyear returns on stocks that coincide with macroeconomic contractions.…”

“…That is, 1 − e Z is assumed to have a multinomial distribution, with outcomes given by actual consumption declines in the data. I use the distribution of consumption declines found by Barro and Ursua (2008). Barro and Ursua update the original cross-country data set of Maddison (2003) used by Barro (2006).…”

“…One possible concern about the data is the relevance of this group for the United States. For this reason, Barro and Ursua (2008) also consider the disaster distribution for a subset consisting of developed countries. For convenience, I follow Barro and Ursua 14 Gabaix (2012) solves a model with disaster risk and power utility assuming linearity generating processes for consumption and dividends.…”

“…which is greater than zero when γ > φ. 16 I follow Barro and Ursua (2008) in using a 10% cutoff to identify large consumption declines. Barro and Ursua (2008).…”

“…16 I follow Barro and Ursua (2008) in using a 10% cutoff to identify large consumption declines. Barro and Ursua (2008). Panel A is the distribution of 1 − e Z in the baseline calibration, while Panel B is the distribution of 1 − e Z in the calibration for OECD countries.…”