BPEA | Spring 2008

Macroeconomic Crises since 1870

José F. Ursúa and
José F. Ursúa Harvard University
Robert J. Barro
Robert Barro
Robert J. Barro Paul M. Warburg Professor of Economics - Harvard University
discussants: Alberto Alesina and
Alberto Alesina Nathaniel Ropes Professor of Political Economy - Harvard University
David H. Romer
David H. Romer
David H. Romer Nonresident Senior Fellow - Economic Studies

Spring 2008

We build on Angus Maddison’s data by assembling international
time series from before 1914 on real per capita personal consumer
expenditure, C, and by improving the GDP data. We have full annual data on
C for twenty-four countries and GDP for thirty-six. For samples starting at
1870, we apply a peak-to-trough method to isolate economic crises, defined as
cumulative declines in C or GDP of at least 10 percent. We find 95 crises for C
and 152 for GDP, implying disaster probabilities of 31_2 percent a year, with
mean size of 21–22 percent and average duration of 31_2 years. Simulation of a
Lucas-tree model with i.i.d. shocks and Epstein-Zin-Weil preferences accords
with the observed average equity premium of around 7 percent on levered
equity, using a coefficient of relative risk aversion of 3.5. This result is robust
to several perturbations, except for limiting the sample to nonwar crises.