From financial crash to debt crisis

Topics: Financial crisis, Debt, United States public debt Pages: 80 (11144 words) Published: November 24, 2013

Carmen M. Reinhart
Kenneth S. Rogoff
Working Paper 15795

1050 Massachusetts Avenue
Cambridge, MA 02138
March 2010

The authors are grateful to Enrique Mendoza, Maurice Obstfeld, Vincent Reinhart, two anonymous referees and the editor for useful suggestions and the National Science Foundation Grant No. 0849224 for financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

© 2010 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.

From Financial Crash to Debt Crisis
Carmen M. Reinhart and Kenneth S. Rogoff
NBER Working Paper No. 15795
March 2010
JEL No. F3,H6,N10
Newly developed long historical time series on public debt, along with modern data on external debts, allow a deeper analysis of the cycles underlying serial debt and banking crises. The evidence confirms a strong link between banking crises and sovereign default across the economic history of great many countries, advanced and emerging alike. The focus of the analysis is on three related hypotheses tested with both “world” aggregate levels and on an individual country basis. First, private debt surges are a recurring antecedent to banking crises; governments quite contribute to this stage of the borrowing boom. Second, banking crises (both domestic ones and those emanating from international financial centers) often precede or accompany sovereign debt crises. Indeed, we find they help predict them. Third, public borrowing accelerates markedly ahead of a sovereign debt crisis; governments often have “hidden debts” that far exceed the better documented levels of external debt. These hidden debts encompass domestic public debts (which prior to our data were largely undocumented).

Carmen M. Reinhart
University of Maryland
Department of Economics
4118D Tydings Hall
College Park, MD 20742
and NBER
Kenneth S. Rogoff
Thomas D Cabot Professor of Public Policy
Economics Department
Harvard University
Littauer Center 232
Cambridge, MA 02138-3001
and NBER

I. Introduction
The economics profession has an unfortunate tendency to view recent experience in the narrow window provided by standard datasets.1 It is particularly distressing that so many cross-country analyses of financial crisis are based on debt and default data going back only to 1980, when the underlying cycles can be half centuries and more, not just thirty years. 2

This paper attempts to address this deficiency by employing a comprehensive new long-term historical database for studying debt and banking crises, inflation, and currency crashes.3 The data covers seventy countries in Africa, Asia, Europe, Latin America, North America, and Oceania. 4 The range of variables encompasses external and domestic debt, trade, GNP, inflation, exchange rates, interest rates, and commodity prices.5 Our analysis spans over two centuries, going back to the date of independence or well into the colonial period for some countries. The construction of our dataset builds on the work of many scholars; it also includes a considerable amount of new material from diverse primary and secondary sources.

Exploiting the multi-century span of the data, we study role of repeated extended debt cycles in explaining the observed patterns of serial default and banking crises that characterize the economic history of so many countries—advanced and...

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