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Macroeconomic Crises since 1870

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  • Robert J. Barro
  • Jose F. Ursua

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

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Bibliographic Info

Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

Volume (Year): 39 (2008)
Issue (Month): 1 (Spring) ()
Pages: 255-350

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Handle: RePEc:bin:bpeajo:v:39:y:2008:i:2008-01:p:255-350

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Keywords: history; macroeconomics; crisis; crises;

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References

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  1. Cogley, T., 1989. "International Evidence On The Size Of The Random Walk In Output," Working Papers, University of Washington, Department of Economics 89-02, University of Washington, Department of Economics.
  2. Balke, Nathan S & Gordon, Robert J, 1989. "The Estimation of Prewar Gross National Product: Methodology and New Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(1), pages 38-92, February.
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  9. Weil, Philippe, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(1), pages 29-42, February.
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  12. Romer, Christina D, 1986. "Is the Stabilization of the Postwar Economy a Figment of the Data?," American Economic Review, American Economic Association, American Economic Association, vol. 76(3), pages 314-34, June.
  13. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  14. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  15. Martin L. Weitzman, 2007. "Subjective Expectations and Asset-Return Puzzles," American Economic Review, American Economic Association, American Economic Association, vol. 97(4), pages 1102-1130, September.
  16. Xavier Gabaix, 2012. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," The Quarterly Journal of Economics, Oxford University Press, vol. 127(2), pages 645-700.
  17. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, Econometric Society, vol. 57(4), pages 937-69, July.
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  1. On low probability catastrophic events
    by Economic Logician in Economic Logic on 2008-06-11 18:13:00
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