The Aftermath of Financial Crisis, Rogoff

The Aftermath of Financial Crisis, Rogoff - American...

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466 American Economic Review: Papers & Proceedings 2009, 99:2, 466–472 = 10.1257/aer.99.2.466 A year ago, we presented a historical analysis comparing the run-up to the 2007 US subprime financial crisis with the antecedents of other banking crises in advanced economies since World War II ( Reinhart and Rogoff 2008a ) . We showed that standard indicators for the United States, such as asset price inflation, rising lever- age, large sustained current account deficits, and a slowing trajectory of economic growth, exhibited virtually all the signs of a country on the verge of a financial crisis—indeed, a severe one. In this paper, we engage in a similar com- parative historical analysis that is focused on the aftermath of systemic banking crises. In our earlier analysis, we deliberately excluded emerging market countries from the comparison set, in order not to appear to engage in hyperbole. After all, the United States is a highly sophisticated global financial center. What can advanced economies possibly have in common with emerging markets when it comes to banking crises? In fact, as Reinhart and Rogoff ( 2008b ) demonstrate, the anteced- ents and aftermath of banking crises in rich countries and emerging markets have a sur- prising amount in common. There are broadly similar patterns in housing and equity prices, unemployment, government revenues, and debt. Furthermore, the frequency or incidence of crises does not differ much historically, even if comparisons are limited to the post–World INTERNATIONAL ASPECTS OF FINANCIAL-MARKET IMPERFECTIONS The Aftermath of Financial Crises By C±²MEN ³. RE´NH±²µ ±ND KENNEµH S. ROGO¶¶ * War II period ( provided the ongoing late-2000s global financial crisis is taken into account ) . Thus, this study of the aftermath of severe financial crises includes a number of recent emerging market cases to expand the relevant set of comparators. Also included in the com- parisons are two prewar developed country episodes for which we have housing price and other relevant data. Broadly speaking, financial crises are pro- tracted affairs. ³ore often than not, the after- math of severe financial crises share three characteristics. First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. ·utput falls ( from peak to trough ) an average of over 9 percent, although the duration of the downturn, averag- ing roughly two years, is considerably shorter than for unemployment. Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes. Interestingly, the main cause of debt explosions is not the widely cited costs
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This note was uploaded on 04/26/2010 for the course ECON 45568 taught by Professor George during the Spring '10 term at Aarhus Universitet.

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The Aftermath of Financial Crisis, Rogoff - American...

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