At Macroblog Dave Altig revisits the topic of “why we didn´t get it”:
“Unfortunately, even seemingly compelling historical evidence is not always so clear cut. An illustration of this, relevant to the failure to forecast the Great Recession, was provided in a paper by Enrique Mendoza and Marco Terrones (from the University of Maryland and the International Monetary Fund, respectively), presented last month at a Central Bank of Chile conference, “Capital Mobility and Monetary Policy.” What the paper puts forward is described by Mendoza and Terrones as follows”:
… in Mendoza and Terrones (2008) we proposed a new methodology for measuring and identifying credit booms and showed that it was successful in identifying credit boom events with a clear cyclical pattern in both macro and micro data.
“The method we proposed is a ‘thresholds method.’ This method works by first splitting real credit per capita in each country into its cyclical and trend components, and then identifying a credit boom as an episode in which credit exceeds its long-run trend by more than a given ‘boom’ threshold, defined in terms of a tail probability event… The key defining feature of this method is that the thresholds are proportional to each country’s standard deviation of credit over the business cycle. Hence, credit booms reflect ‘unusually large’ cyclical credit expansions.
“And here is what they find”:
In this paper, we apply this method to data for 61 countries (21 industrialized countries, ICs, and 40 emerging market economies, EMs), over the 1960-2010 period. We found a total of 70 credit booms, 35 in ICs and 35 in EMs, including 16 credit booms that peaked in the critical period surrounding the recent financial crisis between 2007 and 2010 (again with about half of these recent booms in ICs and EMs each)…
The results show that credit booms are associated with periods of economic expansion, rising equity and housing prices, real appreciation and widening external deficits in the upswing of the booms, followed by the opposite dynamics in the downswing.
“That certainly sounds familiar, and supports the “we should have known” meme. But the full facts are a little trickier. Mendoza and Terrones continue”:
A major deviation in the evidence reported here relative to our previous findings in Mendoza and Terrones (2008) is that adding the data from the recent credit booms and crisis we find that in fact credit booms in ICs and EMs are more similar than different. In contrast, in our earlier work we found differences in the magnitudes of credit booms, the size of the macroeconomic fluctuations associated with credit booms, and the likelihood that they are followed by banking or currency crises.
… while not all credit booms end in crisis, the peaks of credit booms are often followed by banking crises, currency crises of Sudden Stops, and the frequency with which this happens is about the same for EMs and ICs (20 to 25 percent for banking and currency for banking crisis, 14 percent for Sudden Stops).
“Their notion still supports the case of the “we should have known” camp, but here’s the rub (emphasis mine)”:
This is a critical change from our previous findings, because lacking substantial evidence from all the recent booms and crises, we had found only 9 percent frequency of banking crises after credit booms for EMs and zero for ICs, and 14 percent frequency of currency crises after credit booms for EMs v. 31 percent for ICs.
“In other words, based on this particular evidence, we should have been looking for a run on the dollar, not a banking crisis. What we got, of course, was pretty much the opposite.”
Maybe the fact that for the first time since 1938, in 2008 the Fed allowed NGDP to crash had something to do with making “this time a little bit different” (actually, according to Altig, pretty much the opposite)?
On this see Scott Sumner´s post on “Wittgenstein as a macroeconomist”:
Wittgenstein: Tell me, why do people always say it’s natural to assume the Great Recession was caused by the financial crisis of 2008?
Friend: Well, obviously because it looks as though the Great Recession was caused by the financial crisis of 2008.
Wittgenstein: Well, what would it have looked like if it had been caused by Fed policy errors, which allowed nominal GDP to fall at the sharpest rate since 1938, especially during a time when banks were already stressed by the subprime fiasco, and when the resources for repaying nominal debts come from nominal income?
Historinhas 