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From Financial Crash to Debt Crisis

01 Aug 2011-The American Economic Review (National Bureau of Economic Research)-Vol. 101, Iss: 5, pp 1676-1706
TL;DR: In this paper, the authors developed historical time series on public debt, along with data on external debts, allow a deeper analysis of the debt cycles underlying serial debt and banking crises, and they test three related hypotheses at both world aggregate levels and on an individual country basis.
Abstract: Newly developed historical time series on public debt, along with data on external debts, allow a deeper analysis of the debt cycles underlying serial debt and banking crises. We test three related hypotheses at both “world” aggregate levels and on an individual country basis. First, external debt surges are an antecedent to banking crises. Second, banking crises (domestic and those in financial centers) often precede or accompany sovereign debt crises; we find they help predict them. Third, public borrowing surges ahead of external sovereign default, as governments have “hidden domestic debts” that exceed the better documented levels of external debt.

Summary (5 min read)

Introduction

  • This is the first formal application of the core dataset described in Reinhart and Rogoff (2009a), and the scope of the dataset has been expanded significantly as well.
  • Third, public borrowing surges ahead of an external sovereign debt crisis, as governments often have “hidden debts” that far exceed the better documented levels of external debt.
  • The authors use representative country histories to elaborate on and complement some of the patterns seen in the global aggregates.
  • The authors emphasize describing the broad phases of the debt cycle, the sequencing of crises, and some of their features—such as the duration and frequency of default spells.

I. Crisis Definitions and Other Concepts

  • The authors begin by developing working definitions of what constitutes a financial crisis, as well as the methods—quantitative where possible—to date the beginning 6 Quantifying public contingent liabilities is beyond the scope of this paper.
  • This is closely related to the themes in Dani Rodrik and Andres Velasco (2000).
  • 8 See Reinhart (2010), “This Time Is Different Chartbook: Country Histories on Debt, Default, and Financial Crises,” which henceforth will be referred to as the Chartbook.
  • The boundaries drawn are generally consistent with the existing empirical economics literature, which by and large is segmented across the various types of crises considered (e.g., sovereign debt, exchange rate, etc.).
  • Two approaches are used to identify crisis episodes.

A. inflation, hyperinflation, and currency crises

  • Expropriation takes various forms, beyond outright default, repudiation, or the restructuring of domestic or external debts.
  • Reinhart and Rogoff (2004), which classified exchange rate arrangements for the post–World War II period, used a 12-month inflation threshold of 40 percent or higher to define a “freely falling” episode.
  • The authors current work spans a much longer period, before the widespread creation of fiat currency.
  • Hyperinflations, which are defined as episodes where the annual inflation rate exceeds 500 percent, are of modern vintage.9.
  • Figure 1 plots the incidence of the two varieties of monetary, or fiat-money, crises—i.e., exchange rate and inflation crises.

B. debt categories and debt crises

  • External debt crises involve outright default on payment of debt obligations incurred under foreign legal jurisdiction, including nonpayment, repudiation, or the restructuring of debt into terms less favorable to the lender than in the original contract.
  • This source has been supplemented with additional information from Lindert and Morton (1989), Christian Suter (1992) and Michael Tomz (2007).
  • Russia’s default following the revolution holds the record, lasting 69 years.
  • The authors approach toward constructing categorical variables follows that previously described for external debt default.
  • Like banking crises and unlike external debt defaults, the endpoint of domestic default is not always known.

C. Banking crises

  • Due to the paucity of quantitative information, their analysis stresses events when dating banking crises.
  • Often, however, the banking problems do not arise from the liability side, but from a protracted deterioration in asset quality, be it from a collapse in real estate prices or increased bankruptcies in the nonfinancial sector.
  • 14 Domestic debt refers to public debts issued under domestic law.
  • For many of the early episodes it is difficult to ascertain how long the crisis lasted.
  • Many country-specific studies pick up banking crisis episodes not covered by the multicountry literature and contribute importantly to this chronology.

D. the “this-time-is-different” syndrome and serial default

  • Serial default refers to countries which experience multiple sovereign defaults (on external or domestic, public or publicly guaranteed debt, or both).
  • These defaults may occur five or 50 years apart; they may be wholesale default (or repudiation) or a partial default through rescheduling.
  • The essence of the this-time-is-different syndrome is simple.
  • The authors are doing things better, they are smarter, they have learned from past mistakes.
  • The old rules of valuation no longer apply.

II. The Big Picture and Country Histories

  • The authors approach throughout this section is to illustrate each of their main findings with both a big picture based on cross-country aggregation and a representative-country case study (or case studies) from country histories.
  • Each of the main points highlighted in the figures is complemented by the pertinent debt/GDP crisis indicator regressions reported at the bottom of each figure.
  • The authors begin by discussing sovereign default on external debt (that is, when a government defaults on its own external debt or on private-sector debts that were publicly guaranteed).

A. sovereign debt crises

  • For the world as a whole (more than 90 percent of global GDP is represented by their dataset), the 2003–2009 period can be seen as a typical lull that follows large global financial crises.
  • The fourth episode begins in the Great Depression of the 1930s and extends through the early 1950s, when nearly half of all countries stood in default.
  • Reinhart and Rogoff (2008, 2009a), sources cited therein, and authors’ calculations, also known as sources.
  • The hallmark surge in debt on the eve of a debt crisis, banking crisis, or both are quite evident in most of the episodes in the timeline for Brazil and for Greece’s two defaults in 1894 and in 1932—the latter default spell lasting about 33 years from the beginning to its eventual resolution in 1964.
  • The debt aggregates for the emerging economies are the simple arithmetic average of the individual countries’ debt/GDP ratios.

B. Banking crises

  • Prior to World War ii, serial banking crises in the advanced economies were the norm.
  • As the larger emerging markets developed a financial sector in the late 1800s, these economies joined the serial-banking-crisis club.
  • The world’s financial centers, the United Kingdom, the United States, and France, stand out in this regard, with 12, 13, and 15 banking crisis episodes, respectively.
  • All except Portugal experienced at least one postwar crisis prior to the current episode.
  • When the late-2000s crises are fully factored in, the apparent drop will likely be even less pronounced.

C. Banking and debt crises

  • Banking crises most often either precede or coincide with sovereign debt crises.
  • Phenomenon documented by Kaminsky and Reinhart (1999) would also be consistent with this temporal pattern.
  • If, as they suggest, banking crises precede currency crashes, the collapsing value of the domestic currency that comes after a banking crisis begins may undermine the solvency of both private and sovereign borrowers who are unfortunate enough to have important amounts of foreign-currency debts.
  • Other possible explanations are contemplated in the next section, which reviews the theoretical literature on crises with an eye to emphasizing frameworks that are most helpful in shedding light on some of the empirical regularities described in this section.

D. observations on the composition of debts

  • To shed light on the maturity composition of external debt (public and private) around financial crises in aggregate, Figure 15 plots the share of short-term debt during 1970–2009 for emerging markets, where their external debt data is most complete.
  • The vertical lines single out years in which the incidence of banking crises (black lines) and sovereign defaults was highest (20 percent or more of all countries were engulfed in crisis).
  • As the figure illustrates, short-term debts escalate on the eve of banking crises; the ratio of short-term to total debt about doubles from 12 to 24 percent.
  • The small table inset in Figure 10, which Notes:.
  • Only the first year of banking crises (black lines) and defaults (light lines) are shown in the top panel of the figure.

III. Theoretical Underpinnings of the This-Time-Is-Different Syndrome

  • The authors results raise the question of how to explain the remarkable universality of serial default and serial financial crises across time, place, cultures, institutions, and political systems.
  • As such, the roots are almost surely buried deep in human and social behavior, in areas where modern economics has only scratched the surface.
  • Nevertheless, existing economic theory provides important suggestive results.
  • 21 See, for instance, the experiences of El Salvador and Ecuador, in which nearly all postcrisis debts were public.

A. multiple Equilibria Rationales

  • Multiple equilibrium models, and related refinements, would appear to offer an explanation of one central feature of the this-time-is-different syndrome: it is typically much easier to identify when an economy is vulnerable to a financial crisis than to assess the probability or the timing of the collapse.
  • Multiple equilibria in financial markets, especially debt markets, are fairly generic, and therefore consistent with the nearuniversality of crises.
  • The buildup in short-term debt the authors observed on the eve of financial crises (perhaps to economize on interest rate costs as debt rises) certainly increases a country’s vulnerability to panics and runs.
  • During the boom, politicians and investors could misinterpret a “high-trade” outcome among a set of potential sources: Ø. Eitrheim, K. Gerdrup and J.T. Klovland (2004), Reinhart and Rogoff (2009a), and sources cited therein.
  • In these cases (Brazil, Canada, Egypt, India, Nicaragua, Thailand, Turkey, and Uruguay) the debt/GDP series was spliced (with appropriate scaling) to the available debt/GDP data.

B. short-term Biases that Allow crisis Risks to Build up

  • But even setting aside the difficulty of testing or applying multiple equilibria models of financial crises, multiple equilibria analyses beg the deeper question of why politicians, regulators, and, indeed, voters do not take steps to reduce their economy’s vulnerability.
  • Recent quantitative analyses of sovereign default, including, for example, Mark Aguiar and Gita Gopinath (2006), suggest that high discount rates for governments are a key element of any cogent explanation of the borrowing and default cycle.
  • Other political economy factors can also be important in explaining short-termism in financial governance, as the authors argued in Reinhart and Rogoff (2009a).

C. hidden debt

  • The authors results here, as well as a plethora of vivid examples from the accompanying Chartbook, suggest that more attention needs to be paid to hidden debts and liabilities.
  • In a crisis, government debt burdens often come pouring out of the woodwork, exposing solvency issues about which the public seemed blissfully unaware.
  • Indeed, in many economies, the range of implicit government guarantees is breathtaking.
  • Reinhart (2010), Reinhart and Rogoff (2009a) and sources cited therein, also known as sources.
  • Hidden debt has loomed large in many sovereign defaults over history.

D. further models of Leverage and Behavior

  • The authors list of potential crisis models is far from complete.
  • Ana Fostel and John Geanakoplos’s (2008) analysis of leverage cycles is another potentially promising avenue of research.
  • The ignorance, of course, stems from the belief that financial crises happen to other people at other times in other places.
  • 24 Here, modern behavioral economics can hopefully contribute new perspectives.

IV. Debt, Banking Crises, and Default: Cross-Country Evidence

  • In Section II, the authors presented evidence based on both cross-country aggregates and individual country histories that suggests a strong connection between debt 23 24 See Reinhart and Rogoff (2009a, ch. 1) for examples of the this-time-is-different mentality over the ages.
  • 25 The authors are grateful to David Laibson for suggesting these references.
  • Specifically, the authors noted that: (i) public debts rise markedly as a sovereign debt crisis draws near; (ii) private debts exhibit a similar nonlinear buildup ahead of banking crises; and (iii) public debts may or may not contribute to the precrisis surge in indebtedness on the eve of banking crises.

A. Banking and debt crises: temporal Patterns

  • The causal direction between banking and debt crises can potentially run in either or both directions.
  • The specification employed here looks for temporal precedence using a logit specification, which of course is highly nonlinear.
  • Both variables (banking and debt crisis dummies) are treated as potentially endogenous, which can be explained (or not) by its own lagged values and the lagged values of the second variable.
  • The first twist to the standard VAR is that both variables are dichotomous, so their preferred method of estimation is a multinomial logit; the second twist is that to reduce collinearity, rather than include multiple lagged terms, the authors use a single lag of a three-year backward-looking moving average.

B. Public and External debt, default and Banking crises

  • Beyond the causal pattern between the three dichotomous events considered, the authors now include a debt/GDP measure as a regressor in equations (1) and (2).
  • For the longer sample, it is total public debt (domestic plus external), Pd_Yt ; for the post1970 period the authors also consider external (public plus private) debt for the emerging market subgroup, Ed_YEmt.
  • Turning to the debt crisis equation, domestic banking crises continue to be a significant predictor of debt crises, while crises in the financial center have no direct independent effect (obviously, there is an indirect link through a systematic relationship with domestic banking crises).
  • External (public and private) debt for the period over which this data is available (1970–2009) significantly increased the chances of a banking crisis but had no systematic direct impact on the probability of default (Table 3), which continues to depend significantly on whether there is a banking crisis or not.

V. Concluding Observations

  • The authors analysis here has only scratched the surface of what the expansive new database underlying this paper might ultimately yield.
  • Here the authors have chosen to focus particularly on some of the links between debt cycles and the recurrent pattern of banking and sovereign debt crises over the past two centuries.
  • All debt liabilities of a government that are issued under—and subject to—national jurisdiction, regardless of the nationality of the creditor or the currency denomination of the debt (therefore it includes government foreign-currency domestic debt, as defined below), also known as Government domestic debt.
  • Historically, domestic debt (see above) has in many countries been a major part of hidden debt.

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American Economic Review 101 (August 2011): 1676–1706
http://www.aeaweb.org/articles.php?doi
=
10.1257/aer.101.5.1676
1676
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 nancial crises rely on debt and default data
going back only to 1980, when the underlying cycle can be a half century or more
long, not just 30 years.
2
This paper attempts to address this deciency by employing a comprehensive new
long-term historical database for studying debt and banking crises, ination, and
currency crashes.
3
To construct our dataset, we build on the work of many scholars
as well as a considerable amount of new material from diverse primary and second-
ary sources. The data covers 70 countries in Africa, Asia, Europe, Latin America,
North America, and Oceania.
4
The range of variables encompasses external and
domestic debt, trade, GNP, ination, exchange rates, interest rates, and commodity
prices.
5
Our analysis spans over two centuries, going back to the date of indepen-
dence or well into the colonial period for some countries.
1
That is why an exception such as Milton Friedman and Anna Jacobson Schwartz’s (1963) monumental mon-
etary history of the United States still resonates almost one-half century after publication.
2
For a longer perspective on crises, see the work of Michael Bordo, Barry Eichengreen, Peter H. Lindert and
Peter J. Morton, and Moritz Schularick and Alan M. Taylor (2009).
3
This is the rst formal application of the core dataset described in Reinhart and Rogoff (2009a), and the scope
of the dataset has been expanded signicantly as well.
4
See Appendix Table A1 for the full list of countries.
5
External debt refers to debt that is legally governed by foreign law, in contrast to debt governed by the law of
the issuing country. This is not the only way to parse the data, but it is a useful one empirically.
From Financial Crash to Debt Crisis
By C M. R  K S. R*
Newly developed historical time series on public debt, along with
data on external debts, allow a deeper analysis of the debt cycles
underlying serial debt and banking crises. We test three related
hypotheses atboth“world” aggregate levels and on an individual
country basis. First, external debt surges are an antecedent to bank-
ing crises. Second, banking crises (domestic and those in nancial
centers) often precede or accompany sovereign debt crises; we nd
they help predict them. Third, public borrowing surges ahead of
externalsovereign default, as governments have “hidden domestic
debts” that exceed the better documented levels of external debt.
(JEL E44, F34, F44, G01, H63, N20)
* Reinhart: Peterson Institute for International Economics, 1750 Massachusetts Avenue NW, Washington,
DC 20036, NBER, and CEPR; Rogoff: Department of Economics, Harvard University, 1875 Cambridge Street,
Cambridge, MA 02138 (e-mail: krogoff@harvard.edu) and NBER. The authors are grateful to Vincent Reinhart,
Jane Trahan, and Wei Xiong, seminar participants at Columbia, Princeton, and Johns Hopkins universities, and two
anonymous referees for useful suggestions, and the National Science Foundation Grant No. 0849224 for nancial
support.
To view additional materials, visit the article page at http://www.aeaweb.org/articles.php?doi=10.1257/
aer.101.5.1676.

1677
REINHART AND ROGOFF: FROM FINANCIAL CRASH TO DEBT CRISIS
VOL. 101 NO. 5
Exploiting the multicentury span of the data, we study the role of repeated
extended debt cycles in explaining the observed patterns of serial default and bank-
ing crises that characterize the economic history of so many countries—advanced
and emerging alike. We test three related hypotheses atboth“world” aggregate lev-
els and on an individual country basis. First, external debt surges are a recurring
antecedent to banking crises. Second, banking crises (both domestic and those ema-
nating from international nancial centers) often precede or accompany sovereign
debt crises. Indeed, we nd they help predict them. Third, public borrowing surges
ahead of an externalsovereign debt crisis, as governments often have “hidden debts”
that far exceed the better documented levels of external debt. These hidden debts
include domestic public debt (which was largely undocumented prior to our data)
and private debt that becomes public (and publicly known) as the crisis unfolds.
6
A
fourth related hypothesis (which we document but do not test) is that during the nal
stages of the private and public borrowing frenzy on the eve of banking and debt
crises and (most notoriously) bursts of hyperination, the composition of debt shifts
distinctly toward short-term maturities.
7
This paper is organized as follows. Section I describes our approach toward cata-
loging, dating, and connecting the various manifestations of economic crises. Here
we dene the key concepts in our analysis: serial default and the “this time is differ-
ent” syndrome. Section II presents the big picture on global cycles of debt, nancial
crises and sovereign debt crises. We use representative country histories to elaborate
on and complement some of the patterns seen in the global aggregates. The robust-
ness of the descriptive analysis is grounded in a related Chartbook
8
that spans more
than two centuries of data and documents the crisis experience and debt history
of each and every one of the 70 countries that make up our sample. We empha-
size describing the broad phases of the debt cycle, the sequencing of crises, and
some of their features—such as the duration and frequency of default spells. History
suggests that policymakers should not be overly cheered by the absence of major
external defaults from 2003 to 2009 after the wave of defaults in the preceding two
decades. Given that international waves of defaults are typically separated by many
years, if not decades, there is no reason to suppose that serial default is dead.
Section III discusses some alternative theoretical frameworks that might help
explain the observed patterns discussed in the preceding section with a special
emphasis on serial default and the this-time-is-different syndrome. Section IV com-
plements the descriptive big-picture analysis in Section II by exploiting the rich
panel dimension of our data to test for temporal causal patterns across crises and the
role of public and private debts in the run-up to sovereign debt and nancial crises.
I. Crisis Denitions and Other Concepts
We begin by developing working denitions of what constitutes a nancial cri-
sis, as well as the methods—quantitative where possible—to date the beginning
6
Quantifying public contingent liabilities is beyond the scope of this paper.
7
This is closely related to the themes in Dani Rodrik and Andres Velasco (2000).
8
See Reinhart (2010), “This Time Is Different Chartbook: Country Histories on Debt, Default, and Financial
Crises,” which henceforth will be referred to as the Chartbook.

1678
THE AMERICAN ECONOMIC REVIEW
AUGUST 2011
and end of a crisis. The boundaries drawn are generally consistent with the exist-
ing empirical economics literature, which by and large is segmented across the
various types of crises considered (e.g., sovereign debt, exchange rate, etc.). Two
approaches are used to identify crisis episodes. One, which can be applied to ina-
tion and exchange rates crises, is quantitative in nature, while the other, which
we apply to debt and banking crises, is based on a chronology of events. The
crisis markers discussed in this section refer to individual countries as opposed to
global events.
A. Ination, Hyperination, and Currency Crises
Expropriation takes various forms, beyond outright default, repudiation, or the
restructuring of domestic or external debts. Indirect routes to achieving the same
end—ination and currency debasement—can also erode the value of some types
of existing debts. Thus, we date both the beginning of an ination or currency crisis
episode and its duration. Many of the high-ination spells can be best described as
chronic, in that they last many years.
Reinhart and Rogoff (2004), which classied exchange rate arrangements for
the post–World War II period, used a 12-month ination threshold of 40 percent
or higher to dene a “freely falling” episode. Our current work spans a much
longer period, before the widespread creation of at currency. Median ination
rates before World War I were well below those of the more recent period: 0.5
percent for 1500–1799 and 0.7 percent for 1800–1913 versus about 5 percent for
1914–2009. Accordingly, we dene an ination crisis using a threshold of 20 per-
cent per annum. Hyperinations, which are dened as episodes where the annual
ination rate exceeds 500 percent, are of modern vintage.
9
Hungary 1946 holds
the sample’s record despite the recent challenge from Zimbabwe, which comes
in second.
10
To date currency crashes, we follow a variant of Jeffrey A. Frankel and Andrew
K. Rose (1996) and focus exclusively on exchange rate depreciation. This de-
nition is the most parsimonious, as it does not rely on other variables, such as
reserve losses (data that many central banks guard jealously) and interest rate
hikes.
11
Mirroring our treatment of ination episodes, an episode is counted for
the entire period in which annual depreciations exceed the threshold of 15 percent
per annum.
Hardly surprising, currency crashes and ination crises go hand in hand. Figure 1
plots the incidence of the two varieties of monetary, or at-money, crises—i.e.,
exchange rate and ination crises. The “honor” for the record annual currency
crash goes to Greece in 1944, also a year of hyperination (see Reinhart and
Rogoff 2009a).
9
Note that this denition of hyperination (unlike Philip Cagan’s (1956) classic denition of a monthly ination
rate of 50 percent or greater) does not require monthly readings of ination, which are scarce prior to the twentieth
century.
10
See Figure 70 (Zimbabwe) in the Chartbook for a comparison of hyperination episodes.
11
See Graciela L. Kaminsky and Carmen M. Reinhart (1999) for a more detailed discussion of indices that
measure exchange market turbulence.

1679
REINHART AND ROGOFF: FROM FINANCIAL CRASH TO DEBT CRISIS
VOL. 101 NO. 5
B. Debt Categories and Debt Crises
External debt crises involve outright default on payment of debt obligations incurred
under foreign legal jurisdiction, including nonpayment, repudiation, or the restructur-
ing of debt into terms less favorable to the lender than in the original contract.
12
These events have received considerable attention in the academic literature
from leading modern-day economic historians, such as Bordo, Eichengreen, Marc
Flandreau, Lindert and Morton, and Taylor.
13
Relative to early banking crises, much
is known about the causes and consequences of these rather dramatic episodes. For
post-1824, the dates come from several Standard and Poor’s studies. However, these
are incomplete, missing numerous postwar restructurings and early defaults. This
source has been supplemented with additional information from Lindert and Morton
(1989), Christian Suter (1992) and Michael Tomz (2007). Of course, required read-
ing in this eld includes Max Winkler (1933) and William H. Wynne (1951).
While the time of default is accurately classied as a crisis year, in a large num-
ber of cases the nal resolution with the creditors (if it ever does take place) seems
interminable. Russia’s default following the revolution holds the record, lasting 69
years. Greece’s default in 1826 shut it out from international capital markets for
12
The Appendix provides a brief glossary of the major categories of debt studied in this paper.
13
This is not meant to be an exhaustive list of the scholars that have worked on historical sovereign default.
Closely related contributions include Bordo et al (2001), Eichengreen (1992), Eichengreen and Lindert (1989),
Flandreau and Frederic Zumer (2004), and Maurice Obstfeld and Taylor (2003).
F 1. T T C  C C  I C:
E M, 1865–2009
Notes: An ination crisis is dened as a year when ination exceeds 20 percent, while a currency crash is an annual
depreciation (devaluation) greater than or equal to 15 percent per annum. The correlations of ination and exchange
rate crises are contemporaneous.
Sources: Reinhart and Rogoff (2008, 2009a), sources cited therein, and authors’ calculations.
1800–2009 0.607
1800–1940 0.240
1950–2009 0.754
0
10
20
30
40
50
60
1866 1876 1886 1896 1906 1916 1926 1936 1946 1956 1966 1976 1986 1996 2006
0
10
20
30
40
50
60
Share of countries with an annual inflation rate above 20% (shaded bars)
Share of countries with
a currency crash
(a 15% or greater annual
depreciation/devaluation,
solid line)
Emerging markets:
Correlations of the share
of countries with inflation
and currency crises

1680
THE AMERICAN ECONOMIC REVIEW
AUGUST 2011
53 consecutive years, while Honduras’s 1873 default had a comparable duration.
Looking at the full default episode is, of course, useful for characterizing the bor-
rowing/default cycles, calculating hazard rates, etc. But it is hardly credible that a
spell of 53 years could be considered a crisis. Thus, in addition to constructing the
country-specic dummy variables to cover the entire episode, we also employ one
where only the rst year of default enters as a crisis.
Information on domestic debt crises is scarce, but it is not because these crises do
not take place.
14
Indeed, as Reinhart and Rogoff (2009a) show, domestic debt crises
typically occur against much worse economic conditions than the average external
default. Domestic debt crises do not usually involve external creditors, which may
help explain why so many episodes go unnoticed. Another feature that characterizes
domestic defaults is that references to arrears or suspension of payments on sover-
eign domestic debt are often relegated to the footnotes of data tables. Lastly, some
of the domestic defaults that involved the forcible conversion of foreign currency
deposits into local currency have occurred during banking crises, hyperinations, or
a combination of the two; deposit freezes are also numerous. Our approach toward
constructing categorical variables follows that previously described for external
debt default. Like banking crises and unlike external debt defaults, the endpoint of
domestic default is not always known.
C. Banking Crises
Due to the paucity of quantitative information, our analysis stresses events when
dating banking crises. For example, the relative price of bank stocks (or nancial
institutions relative to the market) would be a logical indicator to examine, but such
time series are not readily available, particularly for the earlier part of our sample as
well as for developing countries (where many banks are not publicly traded).
If the beginning of a banking crisis is marked by bank runs and withdrawals, then
changes in bank deposits could be used to date the crisis. This indicator would cer-
tainly have done well in dating the numerous banking panics of the 1800s. Often,
however, the banking problems do not arise from the liability side, but from a pro-
tracted deterioration in asset quality, be it from a collapse in real estate prices or
increased bankruptcies in the nonnancial sector. In such cases, a large increase
in bankruptcies or nonperforming loans would better mark the onset of the crisis.
Unfortunately, indicators of business failures and nonperforming loans are also usu-
ally available only sporadically; the latter are also made less informative by banks’
desire to hide their problems for as long as possible.
Given these data limitations, we mark a banking crisis by two types of events:
(i) bank runs that lead to the closure, merging, or takeover by the public sector of
one or more nancial institutions; or (ii) if there are no runs, the closure, merging,
takeover, or large-scale government assistance of an important nancial institution
(or group of institutions) that marks the start of a string of similar outcomes for
other nancial institutions.
14
Domestic debt refers to public debts issued under domestic law. Most often, such debts have been denomi-
nated in the domestic currency and largely held by residents.

Citations
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BookDOI
TL;DR: This Time Is Different as mentioned in this paper presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes.
Abstract: Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes--from medieval currency debasements to today's subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much--or how little--we have learned. Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts--as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur. An important book that will affect policy discussions for a long time to come, This Time Is Different exposes centuries of financial missteps.

4,595 citations

Posted Content
TL;DR: This paper study the relationship between government debt and real GDP growth and find that the relationship is weak for debt/GDP ratios below a threshold of 90 percent of GDP, while for higher levels, growth rates are roughly cut in half.
Abstract: We study economic growth and inflation at different levels of government and external debt. Our analysis is based on new data on forty-four countries spanning about two hundred years. The dataset incorporates over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies. Second, emerging markets face lower thresholds for external debt (public and private)--which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) The story is entirely different for emerging markets, where inflation rises sharply as debt increases.

2,007 citations

Journal ArticleDOI
TL;DR: This paper study the relationship between government debt and real GDP growth and find that the relationship is weak for debt/GDP ratios below a threshold of 90 percent of GDP, while for higher levels, growth rates are roughly cut in half.
Abstract: We study economic growth and inflation at different levels of government and external debt. Our analysis is based on new data on forty-four countries spanning about two hundred years. The dataset incorporates over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies. Second, emerging markets face lower thresholds for external debt (public and private)--which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) The story is entirely different for emerging markets, where inflation rises sharply as debt increases.

1,623 citations

Journal ArticleDOI
TL;DR: Although there are many potentially confounding differences between countries, the analysis suggests that the interaction of fiscal austerity with economic shocks and weak social protection is what ultimately seems to escalate health and social crises in Europe.

1,161 citations

Journal ArticleDOI
TL;DR: A year ago, this paper presented a historical analysis comparing the run-up to the 2007 US subprime financial crisis with the antecedents of other banking crises in advanced economies since World War II (Reinhart and Rogoff 2008a ).
Abstract: A year ago, we presented a historical analysis comparing the run-up to the 2007 US subprime financial crisis with the antecedents of other banking crises in advanced economies since World War II (Reinhart and Rogoff 2008a ). We showed that standard indicators for the United States, such as asset price inflation, rising lever age, large sustained current account deficits, and a slowing trajectory of economic growth, exhibited virtually all the signs of a country on the verge of a financial crisis—indeed, a severe one. In this paper, we engage in a similar com

942 citations

References
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Book
01 Jan 1974
TL;DR: The authors described three heuristics that are employed in making judgements under uncertainty: representativeness, availability of instances or scenarios, and adjustment from an anchor, which is usually employed in numerical prediction when a relevant value is available.
Abstract: This article described three heuristics that are employed in making judgements under uncertainty: (i) representativeness, which is usually employed when people are asked to judge the probability that an object or event A belongs to class or process B; (ii) availability of instances or scenarios, which is often employed when people are asked to assess the frequency of a class or the plausibility of a particular development; and (iii) adjustment from an anchor, which is usually employed in numerical prediction when a relevant value is available. These heuristics are highly economical and usually effective, but they lead to systematic and predictable errors. A better understanding of these heuristics and of the biases to which they lead could improve judgements and decisions in situations of uncertainty.

31,082 citations

Journal ArticleDOI
TL;DR: The authors showed that bank deposit contracts can provide allocations superior to those of exchange markets, offering an explanation of how banks subject to runs can attract deposits, and showed that there are circumstances when government provision of deposit insurance can produce superior contracts.
Abstract: This paper shows that bank deposit contracts can provide allocations superior to those of exchange markets, offering an explanation of how banks subject to runs can attract deposits. Investors face privately observed risks which lead to a demand for liquidity. Traditional demand deposit contracts which provide liquidity have multiple equilibria, one of which is a bank run. Bank runs in the model cause real economic damage, rather than simply reflecting other problems. Contracts which can prevent runs are studied, and the analysis shows that there are circumstances when government provision of deposit insurance can produce superior contracts.

9,099 citations

Journal ArticleDOI
TL;DR: Three heuristics that are employed in making judgements under uncertainty are described: representativeness, availability of instances or scenarios, which is often employed when people are asked to assess the frequency of a class or the plausibility of a particular development.

5,935 citations

Journal ArticleDOI
David Laibson1
TL;DR: The authors analyzes the decisions of a hyperbolic consumer who has access to an imperfect commitment technology: an illiquid asset whose sale must be initiated one period before the sale proceeds are received.
Abstract: Hyperbolic discount functions induce dynamically inconsistent preferences, implying a motive for consumers to constrain their own future choices. This paper analyzes the decisions of a hyperbolic consumer who has access to an imperfect commitment technology: an illiquid asset whose sale must be initiated one period before the sale proceeds are received. The model predicts that consumption tracks income, and the model explains why consumers have asset-specific marginal propensities to consume. The model suggests that financial innovation may have caused the ongoing decline in U. S. savings rates, since financial innovation in- creases liquidity, eliminating commitment opportunities. Finally, the model implies that financial market innovation may reduce welfare by providing “too much” liquidity.

5,587 citations

BookDOI
TL;DR: This Time Is Different as mentioned in this paper presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes.
Abstract: Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, "this time is different"--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes--from medieval currency debasements to today's subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much--or how little--we have learned. Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts--as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur. An important book that will affect policy discussions for a long time to come, This Time Is Different exposes centuries of financial missteps.

4,595 citations

Frequently Asked Questions (2)
Q1. What are the contributions in "From financial crash to debt crisis" ?

1676 The economics profession has an unfortunate tendency to view recent experience in the narrow window provided by standard datasets. 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. To construct their dataset, the authors build on the work of many scholars as well as a considerable amount of new material from diverse primary and secondary sources. 

Among many diverse avenues for future research, it would be interesting to explore the link between inflation crises and public debt ( the most novel feature of their dataset ) suggested in Figures 3 and 4. 28 This is possibly a fruitful issue to explore in future research. But, perhaps more surprisingly, their analysis suggests that banking crises ( even those of a purely private origin ) increase the likelihood of a sovereign default. There is little to suggest in this analysis that debt cycles and their connections with economic crises have changed appreciably over time.