Romer and Romer vs. Reinhart and Rogoff – MoneyBeat – WSJ

Identifying financial crises after the fact is problematic: researchers will disagree on what their characteristics were, when they started and ended, and what actually counts as a crisis. This is particularly true of crises before World War II or involving developing economies, for which accurate data are harder to come by.

So the Romers created a measure of financial distress based on real-time accounts of developed-economy conditions prepared semiannually by the Organisation for Economic Co-Operation and Development between 1967 and 2007. And to check that the OECD wasn’t for some reason off-base on conditions, they crosschecked it with central bank annual reports and articles in The Wall Street Journal.

They then scored the severity of financial conditions from zero to 15, thus avoiding quibbles over what is and isn’t a crisis and allowing for more precise readings of economic effects.

Their finding: Declines in economic output, as measured by gross domestic product and industrial production, following crises were on average moderate and often short-lived. There was a lot of variation in outcomes, so there was nothing cut and dried about how economies respond to crises…

via Romer and Romer vs. Reinhart and Rogoff – MoneyBeat – WSJ.

Romers’ work suggests the poor performance of economies around the world in the wake of the 2008 financial crisis shouldn’t be cast as inevitable. In The Current Financial Crisis: What Should We Learn From the Great Depressions of the 20th Century? de Cordoba and Kehoe note that:

 Kehoe and Prescott [2007] conclude that bad government policies are responsible for causing great depressions. In particular, they hypothesize that, while different sorts of shocks can lead to ordinary business cycle downturns, overreaction by the government can prolong and deepen the downturn, turning it into a depression.

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