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Crises and Recoveries in an Empirical Model of Consumption Disasters

Author

Listed:
  • Jose Ursua

    (Harvard University)

  • Jon Steinsson

    (Columbia University)

  • Emi Nakamura

    (Columbia University)

  • Robert Barro

    (Harvard University)

Abstract

We estimate an empirical model of consumption disasters using a new panel data set on consumption and output for over 20 countries and more than 100 years. The model allows for permanent and transitory effects of disasters, nesting both unit root and trend stationary consumption growth. We estimate the model using Bayesian methods. Our empirical estimates imply that the probability of entering a disaster state is 3.5%, and the probability of continuing in the disaster state is 47%. During the average disaster, consumption falls by 19%, but a large fraction of disasters involve consumption drops of over 30%. Mean reversion after a disaster is rapid; however, the long-run effect of disasters is estimated to be about 2/3 of their original size. We investigate the asset pricing implications of these rare disasters.

Suggested Citation

  • Jose Ursua & Jon Steinsson & Emi Nakamura & Robert Barro, 2008. "Crises and Recoveries in an Empirical Model of Consumption Disasters," 2008 Meeting Papers 1089, Society for Economic Dynamics.
  • Handle: RePEc:red:sed008:1089
    as

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    References listed on IDEAS

    as
    1. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-240, April.
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    6. Jessica A. Wachter, 2013. "Can Time-Varying Risk of Rare Disasters Explain Aggregate Stock Market Volatility?," Journal of Finance, American Finance Association, vol. 68(3), pages 987-1035, June.
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    13. Emi Nakamura & Dmitriy Sergeyev & Jón Steinsson, 2017. "Growth-Rate and Uncertainty Shocks in Consumption: Cross-Country Evidence," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 1-39, January.
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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