Macroeconomic Crises since 1870
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.
The National Science Foundation has supported this research. We thank for suggestions Olivier Blanchard, John Campbell, George Constantinides, Emmanuel Farhi, Xavier Gabaix, Claudia Goldin, Rustam Ibragimov, Dale Jorgenson, Greg Mankiw, Emi Nakamura, and Jón Steinsson. We appreciate the help with the financial data from Bryan Taylor of Global Financial Data. On the construction of the data base on GDP and personal consumer expenditure, we are grateful for comments and contributions from many people worldwide. A non-exhaustive list includes Roberto Cortés (Argentina); Felix Butschek, Anton Kausel, Felix Rauscher, Marcus Schleibecker, and Rita Schwarz (Austria); Frans Buelens, Erik Buyst, Jean-Jacques Heirwegh, Yves de Lombaerde, Kim Oosterlinck, Peter Scholliers, Yves Segers, Eric Vanhaute, and Guy Vanthemsche (Belgium); Claudio Haddad (Brazil); José Diaz and Eric Haindl (Chile); Adolfo Meisel, Carlos Posada, and Miguel Urrutia (Colombia); Jakob Madsen (Denmark); Riitta Hjerppe and Visa Heinonen (Finland); Claude Diebolt, Thomas Piketty, Gilles Postel-Vinay, and Pierre Villa (France); Carsten Burhop, Davide Cantoni, Nicola Fuchs-Schündeln, Albrecht Ritschl, Mark Spoerer, Beatrice Weder, and Guntram Wolff (Germany); Violetta Hionidou, George Kostelenos, and George Manolas (Greece); Guomundur Jónsson (Iceland); Mausumi Das, Ramesh Kolli, Bharat Ramaswami, Bhanoji Rao, Partha Sen, S. L. Shetty, Rohini Somanathan, and Nittala Subrahmanyasastry (India); Ann Booth, Pierre van der Eng, and Kees van der Meer (Indonesia); Stefano Fenoaltea (Italy); Yana Kandaiya, H.R.H. Raja Nazrin, and Wan Rahim Wan Ahmad (Malaysia); Aurora Gómez, Stephen Haber, Jaime de la Llata, and John Womack (Mexico); Marjan Balkestein, Ferry Lapré, Herman de Jong, Hein Klemann, Jan-Pieter Smits, and Jan Luiten van Zanden (Netherlands); Brian Easton, Anthony Endres, Les Oxley, Andrew Petty, Jakob Preston, Keith Rankin, Grant Scobie, and John Singleton (New Zealand); Ola Grytten and Karin Snesrud (Norway); José Robles (Peru); Ricardo Jose and Richard Hooley (Philippines); Luzia Estevens, Pedro Lains, and José Tavares (Portugal); Paul Gregory (Russia); Ichiro Sugimoto (Singapore); Olu Akimboade and Jon Inggs (South Africa); Myung-Soo Cha, Nak-Nyeon Kim, Mitsuhiko Kimura, Jong-Wha Lee, and Dwight Perkins (South Korea); Leandro Prados (Spain); Rodney Edvinsson (Sweden); Felix Andrist, Philippe Bacchetta, Stefan Gerlach, and Stefanie Schnyder (Switzerland); Sevket Pamuk (Turkey); and Jorge Alvarez and Inés Morales (Uruguay). Many other researchers provided invaluable contributions through their published work. All errors remain our own. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
- The estimated probability of disaster [a decline in national income or consumption of more than 10 percent in a year] is around 3.5...
Robert J. Barro & Jose F. Ursua, 2008. "Macroeconomic Crises since 1870," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(1 (Spring), pages 255-350. citation courtesy of