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. (A separation of consumer expenditure into durables and non-durables is feasible for only a minority of cases.) We have essentially full annual data on C for 22 countries and GDP for 35 countries, and we plan to complete the long-term time series for a few more 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 87 crises for C and 148 for GDP, implying disaster probabilities around 3.6% per year. The disaster size has a mean of 21-22% and an average duration of 3.5 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. We plan a statistical analysis that uses all the time-series data and includes estimation of long-run effects of crises on levels and growth rates of C and GDP. We will also study the bond-bill premium (empirically around 1%) and allow for time-varying disaster probabilities.

General equilibrium pricing of currency and currency options

“…Using a novel dataset, Barro and Ursua (2009) show that the results on consumption are similar. Heston and Summers (1991) report that several countries have experienced a one-year decline in real GDP or consumption of more than 20% since 1950, which include Algeria, Angola, Chad, Iran, Iraq, Namibia, Nicaragua, Niger, Nigeria, Sierra Leone, and Uganda.…”

Crises in Asia: Historical perspectives and implications

“…In contrast, the official forecasts are more hopeful: Singapore (-2% to -5%); Taipei,China (-3%); and Hong Kong, China (-3%). Barro and �rsua's (2008) study on how Asia is affected by a �S/global recession is also useful as it focuses on much longer historical time series; since 1870 including the Great Depression. From Table 8, of the five occasions where the �S real GDP per capita contracted by more than a cumulative 10% from peak to trough, the [1929][1930][1931][1932][1933] Great Depression stands out.…”

“…The accumulated decrease in GDP during a recession (cumulative loss) was about 12%. Barro and �rsua (2008) for GDP disasters based on much longer historical data. As Table 6 in Section IV shows, the average duration of a GDP disaster is 2.9 years and the cumulative loss is about 25%.…”

“…Reinhart and Rogoff (2008) focus on 18 bank-centered financial crises in industrialized countries since World War II. Barro and �rsua (2008) also look at long-term historical data to analyze major economic crises. To date, we know of no systematic empirical research focusing on the stylized facts of economic and financial crises in developing Asian economies, and the links of these crises with global financial crises and recessions.…”

On the welfare cost of rare housing disasters

“…5 Constant relative risk-aversion (CRRA) utility is a special case when = . 6 The expectation operator E j;t is conditional on the information available at time t for a household at age j, and expectations are formed with respect to the stochastic processes governing mortality and other shocks to be described later.…”