Reinhardt & Rogoff’s book is an impressive achievement, though hard for a layman reader like me to appreciate. The most significant thing about it is how many countries are covered and over how much time in their dataset, but I’m just reading a book rather than crunching numbers. The thesis that crises of various sorts (external & domestic sovereign debt, banking, hyperinflation, relative currency crash) have happened many times throughout history is well supported. But if you were to ask whether people were irrationally sanguine about such a prospect (perhaps like Taleb on tail-risk), I don’t really know whether their data can say. Perhaps they could have tried to analyze the expected return of certain assets over all that history, bring up equity premium puzzle. But the authors go for re-iterating the message that it CAN happen rather than trying to establish how likely it is. There is a useful empirical finding that developed countries can “graduate” from serial default and very high inflation. There does not seem to be a process of “graduation” from banking crises. On the other hand, the historical summary of banking crises in the final subject appendix can range from relatively detailed descriptions of failures & takeovers to the repeated boilerplate “Some banks experienced problems”. In the absence of reliable quantitative indicators they mark a banking crisis with “(1) bank runs that lead to the closure, merging, or takeover by the public sector of one or more financial institutions [...] and (2) if there are no runs, the closure, merging, takeover, or large-scale government assistance of an important financial institution (or group of institutions) that marks the start of a string of similar outcomes for other financial institutions”, so I have to assume something of that sort happened in the vaguer crises. The question of how we should define and categorize crises has become a recent dispute between the authors and Bordo & Haubrich (plus John Taylor). Unfortunately, there is nothing in this book that says what it makes sense to do after a crisis, although there’s no statement of a policy-ineffectiveness proposition either. One thing I will say in response to John Cochrane on financial crises causing sovereign debt crises: R&R state that this is largely caused by reduced revenues. So obviously the problematic policy is pro-cyclical progressive taxation!

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