The Aftermath of Financial Crises
Carmen Reinhart and Kenneth Roggoff
• Austria, Hungary 2008• UK, Iceland, Ireland 2007• Malaysia, Thailand Korea, Indonesia, Hong Kong
Philippines, 1997• Japan 1992• Finland, Sweden 1991• Colombia, 1998• Norway, 1987• Spain 1977• US 1929• Norway 1899
• Asset market collapses are deep and protracted• Real housing price declines average 35%
stretched over six years• Equity prices collapse an average of 55% over
3.5 years.• Unemployment rate increases an average of 7%
lasting 4 years.• Output falls from peak to trough by 9% over
two years.• Real value of government debt explodes, rising
an average of 86% in post WWII period.
Janu
ary 19
87
Sept
embe
r 198
7
May
1988
Janu
ary 19
89
Sept
embe
r 198
9
May
1990
Janu
ary 19
91
Sept
embe
r 199
1
May
1992
Janu
ary 19
93
Sept
embe
r 199
3
May
1994
Janu
ary 19
95
Sept
embe
r 199
5
May
1996
Janu
ary 19
97
Sept
embe
r 199
7
May
1998
Janu
ary 19
99
Sept
embe
r 199
9
May
2000
Janu
ary 20
01
Sept
embe
r 200
1
May
2002
Janu
ary 20
03
Sept
embe
r 200
3
May
2004
Janu
ary 20
05
Sept
embe
r 200
5
May
2006
Janu
ary 20
07
Sept
embe
r 200
7
May
2008
Janu
ary 20
09
Sept
embe
r 200
9
May
2010
Janu
ary 20
11
Sept
embe
r 201
10.00
50.00
100.00
150.00
200.00
250.00Case Shiller Composite 10 city House price Index
CX
SR
10
Peak July 2006
Back where we were in May 2003
1/4/198410/4/19847/4/19854/4/19861/4/198710/4/19877/4/19884/4/19891/4/199010/4/19907/4/19914/4/19921/4/199310/4/19937/4/19944/4/19951/4/199610/4/19967/4/19974/4/19981/4/199910/4/19997/4/20004/4/20011/4/200210/4/20027/4/20034/4/20041/4/200510/4/20057/4/20064/4/20071/4/200810/4/20087/4/20094/4/20101/4/201110/4/2011
0
5000
10000
15000
20000
25000
30000
35000
40000
45000Nikkei index, adjusted close
1957-01-02
1958-04-02
1959-07-02
1960-10-02
1962-01-02
1963-04-02
1964-07-02
1965-10-02
1967-01-02
1968-04-02
1969-07-02
1970-10-02
1972-01-02
1973-04-02
1974-07-02
1975-10-02
1977-01-02
1978-04-02
1979-07-02
1980-10-02
1982-01-02
1983-04-02
1984-07-02
1985-10-02
1987-01-02
1988-04-02
1989-07-02
1990-10-02
1992-01-02
1993-04-02
1994-07-02
1995-10-02
1997-01-02
1998-04-02
1999-07-02
2000-10-02
2002-01-02
2003-04-02
2004-07-02
2005-10-02
2007-01-02
2008-04-02
2009-07-02
2010-10-02
2012-01-020.00
200.00
400.00
600.00
800.00
1000.00
1200.00
1400.00
1600.00
1800.00S&P 500 Stock Index
Lehman Brothers fails 9-15-2008
1 3 5 7 9 11 13 15 17 19 21 23 25
-0.06
-0.05
-0.04
-0.03
-0.02
-0.01
0
0.01
0.02
Cumulative % Decline in Unemployment In Recessions in Missouri
1/1980 to 7/19087/1981 to 11/19827/1990 to 3/19913/1001 to 11/200112/2007 to ???
Cum
ulati
ve D
eclin
e in
%
Months Duration
• At the national level Okun’s law gives a rough 3 to 1 relation between real GDP growth and changes in unemployment rates.
• Every 3% increase in real GDP lowers the unemployment rate by 1%.
• Current national unemployment rate=9.7% in February 2010
• Full employment unemployment rate=5-6%• Need 9-12% growth in real GDP to get to full
employment.
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