Macroeconomic Connections Fin254f: Spring 2010 Lecture notes 2.6 Claessens et al. What happens during recessions, crunches and busts?

Outline  Methodology/literature  Results/connections  Summary

Connections  Kindleberger/Aliber Qualitative  Reinhart/Rogoff Quantitative, extreme events, not that systematic  This paper All business cycles (big and small) Systematic process

Methodology and Theory  Business cycle dating Burns and Mitchell(1946) Cross country  Financial mechanisms Bernanke/Gertler(1989) Kiyotaki/Moore(1997)

Data Set  21 OECD countries  IFS/OECD databases  Types of variables Macro Financial (stock and house prices) Policy

Classification System

Magnitude

Recessions (figure 1)  1 in 6 is a credit crunch  1 in 4 is a house bust  1 in 3 is equity bust

Typical Recession ( )  4 Quarters  20% of time in recession  Median peak to trough decline = 1.9%  Cumulative loss (median) = 3%  Severe <  See figure 2 for distributions

Covariations  Standard business cycle movements, figure 3  Comovements across countries, figure 4  Comovements with financial variables, figure 5 Note equity market activity relative to actual recessions

Impact of Financial Market Problems (table 8)  Credit crunches big  Real estate big  Equity not so big  Crises = Reinhart Rogoff crises

Policy Responses  Only major significant impact is government consumption  Increases during recessions and some crunches

Summary  Global recessions worse  Credit and housing bust recessions more severe  Current recession Globally synchronized Combined with credit problems That’s bad!