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Macroeconomic Connections

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

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Macroeconomic Connections

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

  2. Outline • Methodology/literature • Results/connections • Summary

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

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

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

  6. Classification System

  7. Magnitude

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

  9. Typical Recession (1960-2007) • 4 Quarters • 20% of time in recession • Median peak to trough decline = 1.9% • Cumulative loss (median) = 3% • Severe < -3.15 • See figure 2 for distributions

  10. 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

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

  12. Policy Responses • Only major significant impact is government consumption • Increases during recessions and some crunches

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

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