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Historical Comparison

Historical Comparison



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Published by: Ahmed on Nov 11, 2008
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NBER WORKING PAPER SERIESIS THE 2007 U.S. SUB-PRIME FINANCIAL CRISIS SO DIFFERENT? AN INTERNATIONALHISTORICAL COMPARISONCarmen M. ReinhartKenneth S. Rogoff Working Paper 13761http://www.nber.org/papers/w13761NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts AvenueCambridge, MA 02138January 2008
This paper prepared for the American Economic Review Papers and Proceedings. Reinhart: Schoolof Public Policy and Department of Economics, 4105 Van Munching Hall, University of Maryland,
College Park, Maryland 20742; email: creinhar@umd.edu; and Rogoff: Economics Department, 231Littauer Center, Harvard University, Cambridge MA 02138-3001; email: krogoff@harvard.edu. The
authors would like to thank Vincent R. Reinhart and Alan Taylor for their helpful comments. Theviews expressed herein are those of the authors and not necessarily those of the National Bureau of 
Economic Research.
© 2008 by Carmen M. Reinhart and Kenneth S. Rogoff. All rights reserved. Short sections of text,not to exceed two paragraphs, may be quoted without explicit permission provided that full credit,
including © notice, is given to the source.
Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical ComparisonCarmen M. Reinhart and Kenneth S. Rogoff NBER Working Paper No. 13761January 2008JEL No. E44,F30,N20
Is the 2007-2008 U.S. sub-prime mortgage financial crisis truly a new and different phenomena? Our
examination of the longer historical record finds stunning qualitative and quantitative parallels to 18
earlier post-war banking crises in industrialized countries. Specifically, the run-up in U.S. equity and
housing prices (which, for countries experiencing large capital inflows, stands out as the best leading
indicator in the financial crisis literature) closely tracks the average of the earlier crises. Another
important parallel is the inverted v-shape curve for output growth the U.S. experienced as its economyslowed in the eve of the crisis. Among other indicators, the run-up in U.S. public debt and is actually
somewhat below the average of other episodes, and its pre-crisis inflation level is also lower. On the
other hand, the United States current account deficit trajectory is worse than average. A critical question
is whether the U.S. crisis will prove similar to the most severe industrialized-country crises, in which
case growth may fall significantly below trend for an extended period. Or will it prove like one of 
the milder episodes, where the recovery is relatively fast? Much will depend on how large the shock to the financial system proves to be and, to a lesser extent, on the efficacy of the subsequent policy
response.Carmen M. ReinhartUniversity of MarylandSchool of Public Policy and Department of Economic4105 Van Munching HallCollege Park, MD 20742and NBERcreinhar@umd.eduKenneth S. Rogoff Thomas D Cabot Professor of Public PolicyEconomics DepartmentHarvard UniversityLittauer Center 232Cambridge, MA 02138-3001and NBERkrogoff@harvard.edu
I. Introduction
The first major financial crisis of the 21
century involves esoteric instruments,unaware regulators, and skittish investors. It also follows a well-trodden path laid downby centuries of financial folly. Is the “special” problem of sub-prime mortgages this timereally different?Our examination of the longer historical record, which is part of a larger effort oncurrency and debt crises, finds stunning qualitative and quantitative parallels across anumber of standard financial crisis indicators. To name a few, the run-up in U.S. equityand housing prices that Graciela L. Kaminsky and Carmen M. Reinhart (1999) find to bethe best leading indicators of crisis in countries experiencing large capital inflows closelytracks the average of the previous eighteen post World War II banking crises in industrialcountries. So, too, does the inverted v-shape of real growth in the years prior to thecrisis. Despite widespread concern about the effects on national debt of the early 2000stax cuts, the run-up in U.S. public debt is actually somewhat below the average of othercrisis episodes. In contrast, the pattern of United States current account deficits ismarkedly worse.At this juncture, the book is still open on the how the current dislocations in theUnited States will play out. The precedent found in the aftermath of other episodessuggests that the strains can be quite severe, depending especially on the initial degree of trauma to the financial system (and to some extent, the policy response). The averagedrop in (real per capita) output growth is over 2 percent, and it typically takes two years

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