Expectations, Coordination Failures and Macro Crises
-
Daniel Heymann
,
Juan Pablo Brichetti
Abstract
Deep recessions and disruptions in credit markets have caused social concern and motivated research for a long time. They still challenge macroeconomic analysis. We map some observable features of a set of such episodes, trying to find common elements of the whole family of events. The different macroeconomic experiences show a high degree of heterogeneity. Given that, what emerges as a central element of crises is their character as a life-changing episode for the people concerned, which remains in their memory and triggers a search for lessons, as they frustrate past expectations and force widespread reevaluations of wealth and income prospects. Critical periods involve dynamics at different time scales, as economic changes with lasting implications take place in an environment of dramatic day-to-day variability. Crises tend to be associated with breaks in the growth trends of the economies in question, in a way that may surprise not only agents inclined to eccentric behavior, but also those who held beliefs based on prevalent economic analysis. Macroeconomic disturbances of this sort raise strong questions about the pertinence, and the logic, of usual rational expectations assumptions and modeling practices. These issues are briefly discussed in an opening section.
Definition of SLIT economies.
| Union of SLIT | |
|---|---|
| Small | Population |
| Low-income | GNI per capita (2000) |
| Transition | Countries of Eastern and Southern Europe and the former Soviet Union in relevant period (Fischer, Sahay, and Véegh 1996). |
Descriptive statistics of big recessions episodes.
| Variable | SLIT | NSLIT |
|---|---|---|
| Mean GDP drop – all | −16.2% | −12.7% |
| Mean GDP drop – crisis | −20.0% | −10.4% |
| Mean GDP drop – no crisis | −13.1% | −17.1% |
| Mean duration (years) – all | 2.4 | 1.9 |
| Mean duration (years) – crisis | 3.0 | 1.9 |
| Mean duration (years) – no crisis | 1.9 | 1.7 |
| Recovery of peak GDP (years from trough) – all | 6.3 | 3.6 |
| Recovery of peak GDP (years from trough) – crisis | 7.2 | 3.5 |
| Recovery of peak GDP (years from trough) – no crisis | 5.5 | 3.9 |
Definition of types of perturbation.
| Perturbation | Definition | Source |
|---|---|---|
| Stock market crash | More than 40% fall in the market index over a yearly period | Reinhart and Rogoff (2009) |
| Banking crisis | Significant signs of financial distress in a banking system indicated by bank runs, losses in the banking system and bank liquidations; and significant banking policy intervention | Laeven and Valencia (2013); Laeven and Valencia (2018) |
| Currency crisis | Depreciation of the currency against the dollar at least 30% and also 10 points higher than the depreciation rate in the year before | Laeven and Valencia (2013); Laeven and Valencia (2018) |
| Sovereign debt crisis | Sovereign default to private creditors and/or restructuring | Laeven and Valencia (2013); Laeven and Valencia (2018); Mbaye et al., 2018 |
| Sovereign domestic debt crisis | Failure to meet a principal or interest payment on the due date; instances where rescheduled debt is extinguished in terms less favorable than the original obligation; freezing of bank deposits and/or forcible conversions of foreign currency deposits to local currency | Reinhart and Rogoff (2009) |
| Inflation crisis | Annual inflation rate greater than 20%. | Reinhart and Rogoff (2009) |
| Terms of trade shock | Downturns greater than 20%, in a year, or accumulated in two consecutive years | World Bank, ECLAC and OECD |
| International recession | Growth of less than 2% in world GDP or growth of less than 2% in world trade | World Bank and World Trade Organization |
| Armed conflict | A contested incompatibility concerning government and/or territory where the use of armed force between two parties, of which at least one is a government of a state, results in at least 25 battle-related deaths in a calendar year | Uppsala Conflict Data Program; Gleditsch et al., 2002; Pettersson et al., 2019 |
| Natural disaster | Based on human and economic losses, if at least one of the following criteria is satisfied: more than 10% of the population affected in a year; deaths of more than 1% of the population by natural disasters in a year; more than 10% of GDP damage in a year by natural disasters | Emergency Events Database: Centre for Research on the Epidemiology of Disasters (CRED) |
Number of episodes by perturbation.
| Perturbation/Economy | Currency | Sov. debt default | Sov. debt domestic | Banking | Stock market | Inflation | Natural disaster | Armed conflict | ToT | Intern. rec. | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| NSLIT – crisis | 82 | 44 | 17 | 13 | 42 | 54 | 33 | 7 | 18 | 14 | 60 |
| NSLIT – no crisis(*) | 41 | – | – | – | – | – | – | 1 | 13 | 2 | 23 |
| NSLIT – all | 123 | 44 | 17 | 13 | 42 | 54 | 33 | 8 | 31 | 16 | 83 |
| SLIT – crisis | 93 | 52 | 26 | 7 | 30 | 4 | 23 | 19 | 34 | 24 | 73 |
| SLIT – no crisis(*) | 113 | – | – | – | – | – | – | 21 | 31 | 6 | 64 |
| SLIT – all | 206 | 52 | 26 | 7 | 30 | 4 | 23 | 40 | 65 | 30 | 137 |
| Crisis | 175 | 96 | 43 | 20 | 72 | 58 | 56 | 26 | 52 | 38 | 133 |
| No crisis | 154 | – | – | – | – | – | – | 22 | 44 | 8 | 87 |
| All | 329 | 96 | 43 | 20 | 72 | 58 | 56 | 48 | 96 | 46 | 220 |
(*) For 11 NSLIT and 31 SLIT big recessions, no correspondence could be found with the perturbations listed in the table.
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Articles in the same Issue
- Symposium
- Expectations, Coordination Failures and Macro Crises
- Research Foundation
- Demand and Supply in the Cocaine Market: An Empirical Study
- Policy Analysis
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Articles in the same Issue
- Symposium
- Expectations, Coordination Failures and Macro Crises
- Research Foundation
- Demand and Supply in the Cocaine Market: An Empirical Study
- Policy Analysis
- Foreign Aid and Adolescent Fertility Rate: Cross-Country Evidence
