One of the problems in conducting cross-country analyses of infrequent macroeconomic episodes (such as financial crises) is absence of a comprehensive historical dataset. That has been partly remedied by the publication of the Macrohistory Database, assembled by Oscar Jordà, Moritz Schularick, and Alan Taylor (see the paper utilizing this database, discussed here by Jim).
The Jordà-Schularick-Taylor Macrohistory Database is the result of an extensive data collection effort over several years. In one place it brings together macroeconomic data that previously had been dispersed across a variety of sources. …
The database covers 17 advanced economies since 1870 on an annual basis. It comprises 25 real and nominal variables. Among these, there are time series that had been hitherto unavailable to researchers, among them financial variables such as bank credit to the non-financial private sector, mortgage lending and long-term house prices. The database captures the near-universe of advanced-country macroeconomic and asset price dynamics, covering on average over 90 percent of advanced-economy output and over 50 percent of world output.
… in a non-negligible number of cases we had to go back to archival sources including documents from governments, central banks, and private banks. Typically, we combined information from various sources and spliced series to create long-run datasets spanning the entire 1870–2014 period for the first time.
This is an amazing resource. Historical cross-country multivariate data of this sort underpinned research cited in this post, which demonstrated that economic growth following banking crises was typically slower than that following a typical recession. That research highlighted the mendacity of those who conditioned on depth of recession but not presence of banking crises, when assessing growth norms.
Thanks for this, Menzie. I haven’t had a chance to really look at it yet, but I have every expectation it will become a standard data source.
Given the evolution of monetary and fiscal policies, along with TARP, they strengthen the Zarnowitz rule.
how so? it appears the zarnowitz rule begins to break down when the recession is caused by a financial crisis, as opposed to the business cycle.
Output tends to be mean-reverting. There are many factors that influence output. Why do you assume only a financial crisis?
peak, zarnowitz rule gives guidance on the strength of the response as a function of the depth of the recession. in the past, you try to use that as an argument to say we had an underperforming recovery. but the evidence seems to suggest if the cause of the recession was a financial crisis, as opposed to a business cycle recession, the recoveries will behave differently. as i said, it does not appear the zarnowitz rule holds the same in a business cycle recession as a financial crisis recession. output tends to be mean-reverting in a business cycle recession, and that makes sense. but in a financial crisis recession, the mean reversion behavior may not be nearly as strong. probably because of the permanent losses incurred in a financial crisis, which are smaller in a business cycle.
as noted in the jorda paper
“Although the right tail of growth appears to become subdued as credit/GDP rises, the left tail does not, as indicated by rising skewness of growth outcomes. This rising skew fits with our earlier empirical work, in this and other papers, and the work of others, showing that leveraged economies are more at risk of steeper downturns and slower recoveries, often times these taking the form of financial crisis recessions (Reinhart and Rogoff 2009, 2013; Schularick and Taylor 2012; Jorda`, Schularick, and Taylor 2013). From a theoretical standpoint, this result argues for macroeconomic models with an allowance for banking or financial sectors whose scale can influence the shape of recession outcomes. “
There have been many and worse financial crises – panics and bank failures from agriculture, railroads, or pure speculation over the past 200 years. Unfortunately, the response to the recent financial crisis has been inappropriate to a large extent. So, I wouldn’t continue to blame the non-recovery only on a financial crisis.
Peak Trader: There are two ways to address the issue. One is formally, in a cross-country analysis, using econometrics. Another is by anecdote. I think I trust the former approach more.
Menzie Chinn, I would too, if done appropriately. Of course, all financial crises, recessions, and recoveries are different.
Peak Trader: So what exactly was done wrong in this paper? (Ungated version here). This paper was published in Journal of Money, Credit and Banking (Dec. 2013).
Here’s a shorter paper:
https://www.parisschoolofeconomics.eu/IMG/pdf/2014_05_28_rogoff-1-nber-2.pdf
Banking crises have been common.
Of the eight U.S. banking crises, only the recent one had substantial monetary and fiscal stimuli with TARP. Yet, we still haven’t had a recovery.
Also, historical and cross country comparisons represent smaller, more cyclical, and less diversified economies.
Peak
“Of the eight U.S. banking crises, only the recent one had substantial monetary and fiscal stimuli with TARP. Yet, we still haven’t had a recovery.”
we have had a recovery. you are in denial, not unusual. but it has been slow and long, just as past history of financial crisis has indicated. you are suggesting TARP was bad for the economy. i don’t think there are any credible economists out there who would agree that TARP made things worse-your implication the economy would have been the same or better, without TARP. you seem to think we should have strong recoveries out of financial recessions. that is not what jorda et al is implying.
We haven’t had a recovery, even with the massive monetary and fiscal policies, along with TARP.
I’m suggesting other factors are holding us back rather than the financial crisis.
Why do you exclude all other factors?
peak, we have been over this before. you have a strange definition of “recovery”, which presents itself as denial.
i do not exclude other factors, but they do not appear to be the major component. as i said, the evidence does suggest financial crisis recessions have a weaker and slower recovery. we have a recovery of this nature, and it was preceded by a financial crisis.
It’s an L-shaped recovery at best:
https://www.advisorperspectives.com/dshort/updates/2016/09/29/q2-real-gdp-per-capita-0-71-versus-the-1-4-headline-real-gdp
We had a massive pro-cyclical stimulus, to get the economy “out of the ditch.” Why, in the eighth year of the “recovery,” are we still in the ditch? The trillions of dollars of stimulus, both monetary and fiscal, didn’t result in much faster output growth after a financial crisis recession.
So, you still believe all the other factors (both pro and anti growth) that influence output aren’t important.
the data shows a straight line, positive slope. that is a recovery. we already expect a weaker, slower recovery. and we are now above the previous high. again, you seem to have an odd definition of recovery.
but what makes you think we should return to the previous trend? in the us, we have a hyperfinancialized economy and a baby boomer demographic which will hinder growth. why should that economy grow in the same way as the 1960’s? we have had prior periods below trend as well, like the mid to late 1950’s.
again, you believe the recovery would have been equal or better if the stimulus had not been provided? just because the recovery is not as robust as you would like, does not mean the stimulus did not have a positive impact.
We continue to fall further away from trend in 2016.
UCLA Anderson Forecast: U.S. economy falls short of true recovery
June 05, 2013
“U.S. real GDP is now 15.4 percent below the normal 3 percent trend. To get back to that 3 percent trend, we would need 4 percent growth for 15 years, 5 percent growth for eight years, or 6 percent growth for five years, not the disappointing twos and threes we have been racking up recently, which are moving us farther from trend, not closer to it. It’s not a recovery. It’s not even normal growth. It’s bad.”
Don’t avoid the question. What makes you believe we should return to trend?
Anyway, I explained before why a large tax cut was most important (e.g. $5,000 per worker or $700 billion) and how (with a boost in unemployment benefits rather than extensions) it would result in a stronger recovery.
Going forward, the interesting events will occur in China and one or more of the EMs. Notably the credit event that will trigger the next global crisis. So for looking into the future, the Macrohistory Database has only limited value. In 2007, economists did not attend to debt and leverage. Minsky had been marginalized into obscurity. To tout a database limited to advanced nations slides off of the truly important work of figuring out what’s coming.