Macroeconomic Crises since 1870

Abstract

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 3½ percent a year, with mean size of 21–22 percent and average duration of 3½ 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.