Is the crisis problem going more severe post Bretton Woods?

I have been wanting to read this paper for a while as have seen it mentioned in  many papers as references. Anyways I finally read it over this weekend. The paper is written by Michael Bordo, Barry Eichengreen, Daniela Klingebiel and Maria Soledad Martinez-Peria. When Eichengreen and Bordo combine, you are bound to get tons of information and mostly on economic history.

In this paper they look at the crisis problem in 120 years of financial history (Though Rogoff and Reinhart have extended this to nearly 800 years). They divide the financial crisis across various ages- Pre 1914 Gold Standard, World Wars Time, Bretton Woods (1945-72) and Post Bretton Woods (1973 till now). They ask has the crisis problem become more and severe in this era?

The crisis problem is one of the dominant macroeconomic features of our age. Its prominence suggests questions like the following: Are crises growing more frequent? Are they becoming more disruptive? Are economies taking longer to recover? These are fundamentally historical questions, which can be answered only by comparing the present with the past.

To this end, this paper develops and analyzes a data base spanning 120 years of financial history. We find that crisis frequency since 1973 has been double that of the Bretton Woods and classical gold standard periods and is rivaled only by the crisis-ridden 1920s and 1930s. History thus confirms that there is something different and disturbing about our age.

However, there is little evidence that crises have grown longer or output losses have become larger. Crises may have grown more frequent, in other words, but they have not obviously grown more severe.

Our explanation for the growing frequency and chronic costs of crises focuses on the combination of capital mobility and the financial safety net, including the implicit insurance against exchange risk provided by an ex ante credible policy of pegging the exchange rate, which encourages banks and corporates to accumulate excessive foreign currency exposures. We also provide policy recommendations for restoring stability and growth.

Hmmm. The crisis problem may have grown in this era but the output losses were less severe.

The authors also look at three kinds of crisis- Banking, currency and twin crisis and each era has different findings:

  • Currency crisis hasve become more frequent post 1973 leading to higher overall number of crisis. However, we also had high number of currency crisis in Bretton Woods time despitye capital controls and fixed exchange rates
  • Banking crises were higher during the War period because of Great Depression. However, this era is not far behind. So, Bretton woods restrictions limited banking crisis but not currency crisis.
  • Moreover, in pre 1914 there were hardly any crisis of both kinds. This was an era of active financial and trade liberalisation. So we cannot really associate liberalisation with crisis. It is faulty policies which have led to expansion of financial safety net and moral hazard which have led to higher number of crisis.

Interesting paper. This crisis is likely to change the depth and duration severity dring this era as well. Both are likely to go up in this crisis.

2 Responses to “Is the crisis problem going more severe post Bretton Woods?”

  1. Is the crisis problem going more severe post Bretton Woods? « Says:

    […] More: Is the crisis problem going more severe post Bretton Woods? […]

  2. Difference in flow of capital in the two financial globalization periods « Mostly Economics Says:

    […] financial globalization. First from 1870 to First World War and second from 1970 onwards. An interesting paper looks at whether the crisis problem was more severe now or […]

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