Carmen M. Reinhart on Studying Financial Crises
Fast Moving Front Commentary, September 2010
Article: The Aftermath of Financial Crises
Authors: Reinhart, CM;Rogoff, KS
Carmen M. Reinhart talks with ScienceWatch.com and answers a few questions about this month's Fast Moving Fronts paper in the field of Economics & Business.
Why do you think your paper is highly cited?
My paper (co-authored with Kenneth Rogoff and titled "The Aftermath of Financial Crises") was written in 2008. The analysis has been used by policymakers, academics, and financial market participants as a benchmark against which to compare the unfolding crisis that began in 2007 in the United States and engulfed many European countries subsequently.
For economists searching for theoretical frameworks to understand such crises, it provides empirical regularities that merit explanation. Importantly, our relatively short paper was backed up by details and broader findings available in our (now published) 2009 Princeton University Press book This Time is Different: Eight Centuries of Financial Folly.
Does it describe a new discovery, methodology, or synthesis of knowledge?
"...gaining a better understanding of how the private and public debts that are built up in the run-up to the crises are “unwound” in the years following the crises, with potential implications for growth, inflation, and macroeconomic policies."
The study provides a quantitative comparison of the performance of key economic indicators around 14 severe financial crises in five advanced and nine emerging market countries. It is a concise summary of the depth (magnitude) and the duration (in years) of the decline in real GDP, rise in unemployment, collapses in equity and real estate prices, and surge in government debt that has accompanied these crises.
Would you summarize the significance of your paper in layman's terms?
A central theme of our empirical findings is that the recoveries from severe financial crises are protracted affairs and that progress is especially slow in employment and the housing market. The extensive coverage that our analysis has received in the popular press has helped inform public opinion and form expectations of the post-crisis economic environment.
How did you become involved in this research, and how would you describe the particular challenges, setbacks, and successes that you've encountered along the way?
We have a long history studying financial crises, broadly defined to include (besides banking crises) sovereign debt crises, high inflation, currency instability and severe recessions. These extreme episodes of economic duress are relatively rare, yet at the same time, detecting common patterns requires as many observations as possible. Thus a major challenge in our line of work involves researching episodes across time and across national boundaries, where data, documentation, and analyses are comparatively rare.
One important success has been to compile an extensive multi-century and multi-country database on financial crises and related macroeconomic and financial indicators.
Where do you see your research leading in the future?
We are currently working on gaining a better understanding of how the private and public debts that are built up in the run-up to the crises are "unwound" in the years following the crises, with potential implications for growth, inflation, and macroeconomic policies.
Do you foresee any social or political implications for your research?
It is important to distinguish here between what one hopes for and what is probable. In the best of scenarios, our work can help inform policymakers on the "early detection" of vulnerability to financial crises—which may help avoiding these altogether. Of course, if history is any guide, this may be wishful thinking if policymakers and financial market participants insist that "This Time is Different."
Our 2009 book, which bears that title, defines the This Time is Different Syndrome as rooted in the firmly-held beliefs that: (i) Financial crises and negative outcomes are something that happen to other people in other countries at other times (these do not happen here and now to us) ;(ii) we are doing things better, we are smarter, we have learned from the past mistakes; (iii) as a consequence, old rules of valuation are not thought to apply any longer1.
Professor Carmen M. Reinhart
Department of Economics
University of Maryland
College Park, MD USA
1 Carmen M. Reinhart and Kenneth S. Rogoff This Time is Different: Eight Centuries of Financial Folly, (Princeton: Princeton University Press, 2009).
KEYWORDS: Financial Crises.