Comments and Discussion

Comments and Discussion - ROBERT J. BARRO Harvard...

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255 ROBERT J. BARRO Harvard University JOSÉ F. URSÚA Harvard University Macroeconomic Crises since 1870 ABSTRACT We build on Angus Maddison’s data by assembling inter- national time series from before 1914 on real per capita personal consumer expenditure, C, and by improving the GDP data. We have full annual data on C for twenty-four countries and GDP for thirty-six. For samples starting at 1870, we apply a peak-to-trough method to isolate economic crises, de±ned as cumulative declines in C or GDP of at least 10 percent. We ±nd 95 crises for C and 152 for GDP, implying disaster probabilities of 3 1 2 percent a year, with mean size of 21–22 percent and average duration of 3 1 2 years. Simulation of a Lucas-tree model with i.i.d. shocks and Epstein-Zin-Weil preferences accords with the observed average equity premium of around 7 percent on levered equity, using a coef±cient of relative risk aversion of 3.5. This result is robust to several perturbations, except for limiting the sample to nonwar crises. A n earlier study by Barro used Thomas Rietz’s insight on rare eco- nomic disasters to explain the equity premium puzzle introduced by Rajnish Mehra and Edward Prescott. 1 Key parameters were the probability p of disaster and the distribution of disaster sizes b. Because large macro- economic disasters are rare, pinning down p and the b distribution from historical data requires long time series for many countries, along with the assumption of rough parameter stability over time and across countries. Barro’s 2006 study relied on long-term international GDP data for thirty- ±ve countries from Angus Maddison’s 2003 dataset. 2 Using the de±nition of an economic disaster as a peak-to-trough fall in GDP per capita of at least 15 percent, Barro found sixty disasters, corresponding to p = 1.7 per- cent a year. The average disaster size was 29 percent, and the empirical size distribution was used to calibrate a model of asset pricing. 1. Barro (2006); Rietz (1988); Mehra and Prescott (1985). 2. Maddison (2003).
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The underlying asset pricing theory relates to consumption, rather than GDP. This distinction is especially important for wars. For example, in the United Kingdom during the two world wars, GDP increased while con- sumer expenditure fell sharply, the difference representing mostly added military spending. Maddison’s 2003 dataset provides national accounts information only for GDP. Our initial idea was to add consumption, which we approximate by real personal consumer expenditure, C, because of dif- ±culties in most cases in separating durable goods consumption from that of nondurable goods and services. (We discuss later the breakdown of C into durables versus nondurables for a subset of countries with available data for crisis periods.) We have not assembled data on government con- sumption, some of which may substitute for C and thereby affect asset pricing. However, this substitution is probably unimportant for military expenditure, which is the type of government spending that moves sharply during some disaster events.
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Comments and Discussion - ROBERT J. BARRO Harvard...

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