This Time Is Different

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NBER WORKING PAPER SERIES

THIS TIME IS DIFFERENT: A PANORAMIC VIEW OF EIGHT CENTURIES OF FINANCIAL CRISES Carmen M. Reinhart Kenneth S. Rogoff Working Paper 13882 http://www.nber.org/papers/w13882

NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 2008

The authors are grateful to Vincent Reinhart for useful comments and suggestions and Ethan Ilzetzki, Fernando Im, and Vania Stavrakeva for excellent research assistance. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. © 2008 by Carmen M. Reinhart and Kenneth S. Rogoff. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

This Time is Different: A Panoramic View of Eight Centuries of Financial Crises Carmen M. Reinhart and Kenneth S. Rogoff NBER Working Paper No. 13882 March 2008 JEL No. E6,F3,N0 ABSTRACT This paper offers a “panoramic” analysis of the history of financial crises dating from England's fourteenth-century default to the current United States sub-prime financial crisis. Our study is based on a new dataset that spans all regions. It incorporates a number of important credit episodes seldom covered in the literature, including for example, defaults in India and China. As the first paper employing this data, our aim is to illustrate some of the broad insights that can be gleaned from such a sweeping historical database. We find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies. Major default episodes are typically spaced some years (or decades) apart, creating an illusion that "this time is different" among policymakers and investors. A recent example of the "this time is different" syndrome is the false belief that domestic debt is a novel feature of the modern financial landscape. We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses. Thus, the recent US sub-prime financial crisis is hardly unique. Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements.

Carmen M. Reinhart University of Maryland School of Public Policy and Department of Economics 4105 Van Munching Hall College Park, MD 20742 and NBER creinhar@umd.edu Kenneth S. Rogoff Thomas D Cabot Professor of Public Policy Economics Department Harvard University Littauer Center 232 Cambridge, MA 02138-3001 and NBER krogoff@harvard.edu

I. Introduction The early years of the 21st century, following a mild global recession in 2001, have proved to be a period of remarkable macroeconomic stability, with strong growth and a notable dearth of sovereign defaults. 1 Even with the onset of a major global banking crisis sparked by the United States’ “sub-prime” mortgage default crisis, no major emergingmarket government has even come close to defaulting on its external debt since 2002. Many pundits are arguing that thanks to more prudent fiscal and monetary policy, “this time is different,” and the world is unlikely to witness a rash of sovereign defaults for the foreseeable future. Such confidence, in fact, reflects the general tendency to view recent experience in the narrow window provided by standard datasets on debt and default, which typically begin in 1980 and are limited in several other important respects.2 An event that is rare in that twenty-year span may not be all that rare when placed in a broader context. What is the appropriate context? This paper introduces a comprehensive new database for studying international debt and banking crises, inflation, currency crashes and debasements. The data covers sixty-six countries in Africa, Asia, Europe,...
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