Ebook This Time is Different: A Panoramic View of Eight Centuries of Financial Crises
The economics profession has an unfortunate tendency to view recent experience in the narrow window provided by standard datasets. With a few notable exceptions, cross country empirical studies on financial crises typically begin in 1980 and are limited in several other important respects. Yet an event that is rare in a three decade span may not be all that rare when placed in a broader context.
This paper introduces a comprehensive new historical database for studying international debt and banking crises, inflation, currency crashes and debasements. The data covers sixty-six countries in Africa, Asia, Europe, Latin America, North America, and Oceania. The range of variables encompasses, among many other dimensions, external and domestic debt, trade, GNP, inflation, exchange rates, interest rates, and commodity prices. The coverage spans eight centuries, generally going back to the date of independence for most countries, and well into the colonial period for some. As we detail in an annotated appendix, the construction of our dataset has built heavily on the work of earlier scholars. However, it also includes a considerable amount of new material from diverse primary and secondary sources. In addition to a systematic dating of external debt and exchange rate crises, the appendix to this paper also catalogues dates for domestic inflation and banking crises. For the dating of sovereign defaults on domestic (mostly local currency) debt, see Reinhart and Rogoff (2008).
The paper is organized as follows. Section II summarizes highlights from a first view of the extended dataset, with special reference to the current conjuncture. Among other things, we note that policymakers should not be overly cheered by the absence of major external defaults from 2003 to 2007, after the wave of defaults in the preceding two decades. Serial default remains the norm, with international waves of defaults typically separated by many years, if not decades.
Many foreign investors and policymakers today seem lulled by the fact that many emerging market governments have become less reliant on foreign currency external borrowing than in the recent past. Countries have instead been relying more on domestic currency debt issued in local markets. Yet, as we show in a companion paper, reliance on domestic debt is hardly new, and the view that domestic debt can be largely ignored in looking at external debt sustainability is hard to reconcile with the extensive historical experience.
Our dataset reveals that the phenomenon of serial default is a universal rite of passage through history for nearly all countries as they pass through the emerging market state of development. This includes not only Latin America, but Asia, the Middle East and Europe. We also find that high inflation, currency crashes, and debasements often go hand-in-hand with default. Last, but not least, we find that historically, significant waves of increased capital mobility are often followed by a string of domestic banking crises.
Section III of the paper gives a brief overview of the sample and data. Section IV catalogues the history of serial default on external debts, from England’s defaults in the Middle Ages, to Spain’s thirteen defaults from the 1500s on, to twentieth-century defaults in Asia, Africa, and Latin America. Our database marks the years that default episodes are resolved as well as when they began, allowing us to look at the duration of default in addition to the frequency.
Section V of the paper looks at the effect of global factors on sovereign default, including commodity prices and capital flows emanating from the center countries. We show how shocks emanating from the center countries can lead to financial crises worldwide. In this respect, the 2007–2008 US sub-prime financial crisis is hardly exceptional.
Section VI shows that episodes of high inflation and currency debasement are just as much a universal right of passage as serial default. Section VII introduces a composite index that aggregates the “varieties of crises.” In the concluding section, we take up the issue of how countries can graduate from the perennial problem of serial default. Will the early 21st century prove different?
Appendix A gives a brief synopsis of how the database was constructed, while Appendices I (macroeconomic series) and II (debt) list all the variables in the database and provide their sources on a period-by-period and country by-country basis.
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