What Happens During Recessions, Crunches and Busts?

Transkript

1 What Happens During Recessions, Crunches and Busts? Stijn Claessens, M. Ayhan Köse K and Marco E. Terrones Financial Studies Division Research Department International Monetary Fund 1

2 Disclaimer! The views presented here are those of the authors and do NOT necessarily reflect the views of the IMF or IMF policy 2

3 Motivation In some advanced countries, especially the United States Sharp decline in house/equity prices; tightening credit Slowdown in economic activity Concerns about recession: duration and amplitude But, generally, relationships between credit, asset price movements, and economic activity in recessions not well understood 3

4 Motivation What do we know about recessions, as they relate to credit (crunches) and asset prices (busts)?? So far only a small sample of (case) studies have been studied. asset-price price-bust recessions do not appear to be necessarily more costly than other recession episodes. Specifically,,, recessions that follow swings in asset prices are not necessarily longer, deeper, and associated with a greater fall in output and investment than other recessions Roger W. Ferguson, January 12, 2005 Ferguson was the Vice Chairman of the FRB over

5 Objective: Three Questions How do macro and financial variables behave around recessions, crunches and busts? Are recessions associated with credit crunches and asset price busts different than other recessions? What might this mean for recent developments in the United States? How? By providing a comprehensive analysis of a large number of recessions, crunches and busts (purely statistical exercise; event study; no discussion of causation or potential sources) 5

6 Results How do macro and financial variables behave around recessions, crunches and busts? Mostly procyclical. Residential investment and credit appear to be the key variables to understand the direction of the economy (especially in the United States) Are recessions associated with credit crunches and asset price busts different than other recessions? Yes. Recessions associated with crunches and busts tend to be longer and deeper What might this mean for recent developments in the US? Signs of a slowing economy but also an aggressive monetary policy stance already in place. Not clear whether this will be a mid-cycle slowdown or recession 6

7 Outline Data and Methodology Recessions: Basic Characteristics Credit Crunches and Asset Price Busts Recessions, Crunches and Busts Policy Responses Recent Developments in US Conclusions 7

8 Database Country Sample: : 21 OECD countries; Quarterly data; 1960:1-2007:4; OECD, BIS, HAVER, IFS Macro Variables: Output, consumption, investment, industrial production, unemployment, inflation, exports, and imports Financial Variables: Credit, house and equity prices Policy Variables: Government consumption and short-term term interest rates 8

9 Countries Included in Study Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States 9

10 Evolution of a Business Cycle Aggregate economic activity Linear growth path Expansion Recession Expansion Trough Peak Time Trough Peak 10

11 Methodology Find cyclical turning points in macro and financial variables using standard business cycle dating algorithm (Harding and Pagan, 2002, Journal of Monetary Economics) Document chronologies of business cycles using a consistent definition; similar to the NBER turning points in the United States Examine the basic characteristics (duration, amplitude) and temporal patterns around recessions; analyze the macroeconomic variables in recessions coinciding with credit crunches and asset price busts 11

12 Methodology Identify severe recessions, credit crunches and asset price busts Severe Recession: a peak-to to-trough trough decline in GDP in the worst quartile of all declines Credit Crunch: a peak-to to-trough trough contraction in credit in the worst quartile of all credit contractions Asset Price Bust: a peak-to to-trough trough decline in asset prices in the worst quartile of all price declines 12

13 Macro Recessions and Financial Contractions Is the sample large enough? Yes Macro Recessions -122 Recessions in GDP (30 Severe), US (7/0) Financial Contractions Contractions in Credit (28 Crunch), US (5/2) Declines in House Prices (28 Busts), US (7/0) Declines in Equity Prices (58 Busts), US (14/1) 13

14 Recessions in OECD (fraction of countries in recession; shaded bars are US recessions) GDP Q1 1963Q1 1966Q1 1969Q1 1972Q1 1975Q1 1978Q1 1981Q1 1984Q1 1987Q1 1990Q1 1993Q1 1996Q1 1999Q1 2002Q1 2005Q1 14

15 Recessions and Credit Contractions (fraction of countries, shaded bars are US recessions) 60 GDP 40 Credit Q1 1963Q1 1966Q1 1969Q1 1972Q1 1975Q1 1978Q1 1981Q1 1984Q1 1987Q1 1990Q1 1993Q1 1996Q1 1999Q1 2002Q1 2005Q1 15

16 Recessions and House Price Contractions (fraction of countries; shaded bars are US recessions) 80 House Prices GDP Q1 1973Q1 1976Q1 1979Q1 1982Q1 1985Q1 1988Q1 1991Q1 1994Q1 1997Q1 2000Q1 2003Q1 2006Q1 16

17 Recessions and Equity Price Contractions 100 (fraction of countries, shaded bars are US recessions) 80 Equity Prices GDP Q1 1963Q1 1966Q1 1969Q1 1972Q1 1975Q1 1978Q1 1981Q1 1984Q1 1987Q1 1990Q1 1993Q1 1996Q1 1999Q1 2002Q1 2005Q1 17

18 What did we learn? Recessions coincide to some degree across OECD countries Recessions have been fewer as business cycles have moderated over time Credit contractions overlap most often with recessions House price declines overlap quite often with recessions Equity price declines are more independent from output recessions ( predict( 8 out of 5 recessions ) 18

19 Outline Data and Methodology Recessions: Basic Characteristics Credit Crunches and Asset Price Busts Recessions, Crunches and Busts Policy Responses Recent Developments in US Conclusions 19

20 Recessions: Duration (# of quarters from Peak to Trough) All Recessions Severe Recessions 20

21 Recessions: Amplitude ( percent change in GDP from Peak to Trough) All Recessions Severe Recessions 21

22 Recessions: Macroeconomic Variables 0 (percent change from Peak to Trough) All Recessions -12 Severe Recessions -14 Output Consumption Res Investment Non-Res Investment Total Investment Industrial Production 22

23 Recessions: Unemployment Rate and Inflation 2 (percentage point change from Peak to Trough) 1 All Recessions Severe Recessions 0-1 Unemployment Rate Inflation Rate 23

24 Typical Recession Dynamics Compare the evolution over 12 quarters before and after peak of economic and financial data with the medians of past recessions in the United States and other OECD countries Percent changes from a year earlier; zero denotes the peak, or the beginning of a recession Shaded areas are upper and lower quartiles of past recessions in other OECD countries 24

25 Recessions: GDP (Percent change from a year earlier; zero denotes peak; x-axis x quarter) 6 GDP 4.5 US OECD-US

26 Recessions: Industrial Production (Percent change from a year earlier; zero denotes peak; x-axis x quarter) Industrial Production US OECD-US

27 Recessions: Residential Investment (Percent change from a year earlier; zero denotes peak; x-axis x quarter) Residential Investment 5 OECD-US US

28 Recessions: Private Credit (Percent change from a year earlier; zero denotes peak; x-axis x quarter) 12 Private Credit OECD-US US 28

29 Recessions: House Prices (Percent change from a year earlier; zero denotes peak; x-axis x quarter) 12 House Price 8 4 OECD-US 0 US

30 30 Recessions: Equity Prices (Percent change from a year earlier; zero denotes peak; x-axis x quarter) Equity Price US 0 OECD-US

31 What did we learn? Most macro variables are procyclical during recessions in the US and other OECD countries Credit, house prices and equity prices start weakening ahead of recessions Recessions in the United States vs. other OECD countries - Similarities: Duration and amplitude of output - Differences: Typically, deeper contractions in industrial production, residential investment and credit in the US than in other OECD countries 31

32 Outline Data and Methodology Recessions: Basic Characteristics Credit Crunches and Asset Price Busts Recessions, Crunches and Busts Policy Responses Recent Developments in US Conclusions 32

33 Crunches and Busts: Duration (# of quarters from Peak to Through) Credit Crunch House Price Bust Equity Price Bust 33

34 Crunches and Busts: Amplitude (percent change from Peak to Trough) Credit Crunch House Price Bust Equity Price Bust 34

35 Crunches and Busts: Investment (percent change from Peak to Trough) Residential Investment Total Investment -15 Credit Crunch House Price Bust Equity Price Bust 35

36 What did we learn? Credit crunches and asset price busts can last a long time, typically longer than output recessions Credit crunches and asset busts are associated with substantial declines in credit and asset prices While output can recover during a credit crunch or housing bust, (residential) investment drops significantly 36

37 Outline Data and Methodology Recessions: Basic Characteristics Recessions: Macro Variables Recessions, Crunches and Busts Policy Responses Recent Developments in US Conclusions 37

38 Recessions, Crunches and Busts Identify recessions coinciding with credit crunches and asset price busts (a crunch or bust starting before or occurring at the same time) - 18 Recessions overlap with Credit Crunches - 34 Recessions overlap with House Price Busts - 45 Recessions overlap with Equity Price Busts Study duration and amplitude of these events; Focus on certain macroeconomic variables 38

39 Recessions w/ Crunches and Busts: Duration (# of quarters from Peak to Trough) 5 4 * * Recession without Recession with Recession with Severe Credit Crunch House Price Bust Equity Price Bust 39

40 0.0 Recessions w/ Crunches and Busts: GDP (percent change from Peak to Trough) * * Recession without Recession with Recession with Severe Credit Crunch House Price Bust Equity Price Bust 40

41 Recs w/ Crunches and Busts: Residential Investment (percent change from Peak to Trough) * * Recession without Recession with Recession with Severe -9 Credit Crunch House Price Bust Equity Price Bust 41

42 Recessions w/ Crunches and Busts: Unemployment (percentage point change from Peak to Trough) 1.5 Recession without Bust Recession with Bust Recession with Severe Bust * * Credit Crunch House Price Bust Equity Price Bust 42

43 Recessions w/ Crunches and Busts: Inflation (percentage point change from Peak to Trough) Recession without Bust Recession with Bust Recession with Severe Bust Credit Crunch House Price Bust Equity Price Bust 43

44 What did we learn? Are recessions associated with credit crunches and house price busts different than other recessions in OECD countries? Yes. Recessions with credit crunches and housing price busts are on average associated with slightly longer and deeper recessions, with greater declines in residential investment and higher unemployment 44

45 Outline Data and Methodology Recessions: Basic Characteristics Credit Crunches and Asset Price Busts Recessions, Crunches and Busts Policy Responses Recent Developments in US Conclusions 45

46 Recessions w/ Crunches and Busts: Interest Rates 0.0 (short-term term real rates; percentage point change from Peak to Trough) -0.5 ALL -1.0 SEVERE without bust with bust -1.5 Recessions Credit Crunches House Price Busts Equity Price Busts 46

47 4.0 Recessions w/ Crunches and Busts: Gov Cons (percent change from Peak to Trough) 3.0 without bust with bust 2.0 ALL SEVERE Recessions Credit Crunches House Price Busts Equity Price Busts 47

48 What did we learn? Policy -related variables differ by severity of and type of recessions In severe recessions, observe lower real interest rate and higher government consumption In recessions with credit crunches, government consumption increases much more than in other recessions 48

49 Outline Data and Methodology Recessions: Basic Characteristics Credit Crunches and Asset Price Busts Recessions, Crunches and Busts Policy Responses Current Slowdown in US Conclusions 49

50 Current Slowdown in US Compare the evolution over past three years in US economic and financial data with the medians of past recessions in the United States and other OECD countries Shaded areas are upper and lower quartiles of past recessions in other OECD countries For presentational purposes,, the last available observation, 2008 first quarter, is assumed to be the peak of the current US business cycle 50

51 GDP Growth Somewhat Below Typical (Percent change from a year earlier; zero denotes peak; x-axis x quarter) 6 GDP 4.5 US US current OECD-US

52 Consumption on Typical Path (Percent change from a year earlier; zero denotes peak; x-axis x quarter) 6 Consumption 4 US 2 US current OECD-US

53 Ind l Prod Somewhat Below Typical (Percent change from a year earlier; zero denotes peak; x-axis x quarter) 8 6 Industrial Production US US current OECD-US

54 Total Investment Down Steeper (Percent change from a year earlier; zero denotes peak; x-axis x quarter) 12 Total Investment 8 US 4 0 OECD-US -4 US current

55 Res l Investment Down More Sharply (Percent change from a year earlier; zero denotes peak; x-axis x quarter) Residential Investment US 0-5 OECD-US US current

56 Non Res Investment Staying Up (Percent change from a year earlier; zero denotes peak; x-axis x quarter) Nonresidential Investment US current 6 4 US 2 0 OECD-US

57 Exports Growing Above Typical (Percent change from a year earlier; zero denotes peak; x-axis x quarter) 15 Exports 10 US current OECD-US 5 US

58 Imports on Typical Slowdown Path (Percent change from a year earlier; zero denotes peak; x-axis x quarter) 15 Imports 10 US 5 OECD-US 0 US current

59 Inflation Going Up from Below Typical 15 Inflation Rate (Percent; zero denotes peak; x-axis x quarter) 10 OECD-US 5 US US current

60 10 Unemployment on Typical Path (Percent; zero denotes peak; x-axis x quarter) Unemployment Rate 8 6 US OECD-US 4 US current

61 Credit, after Growth, on Downward Path (Percent change from a year earlier; zero denotes peak; x-axis x quarter) 12 Private Credit US current 8 4 OECD-US 0 US

62 House Prices Growth Down Sharply (Percent change from a year earlier; zero denotes peak; x-axis x quarter) House Price 8 6 US current OECD-US US

63 Equity Prices Increase, after Up, Down (Percent change from a year earlier; zero denotes peak; x-axis x quarter) 30 Equity Price US current US 0-10 OECD-US

64 Short-term term Interest Rates Down Sharply (Percent change from a year earlier; zero denotes peak; x-axis x quarter) 6 Real Short-term Interest Rate 4 US current 2 OECD-US 0 US

65 Gov Consumption on Upward Path (Percent; zero denotes peak; x-axis x quarter) 6 Government Consumption OECD-US 2 US 1 US current

66 What did we learn? Signs of a slowing economy The declines in house prices and residential investment in the current episode are sharper than those observed in earlier recessions Yet, the monetary policy response appears to be more aggressive relative to earlier episodes Not clear whether this will be a mid-cycle slowdown or recession 66

67 Outline Data and Methodology Recessions: Basic Characteristics Credit Crunches and Asset Price Busts Recessions, Crunches and Busts Policy Responses Recent Developments in US Conclusions 67

68 Conclusions How do macro and financial variables behave around recessions, crunches and busts? Mostly procyclical. Residential investment and credit appear to be the key variables to understand the direction of the economy (especially in the United States) Are recessions associated with credit crunches and asset price busts b different than other recessions? Yes. Recessions associated with crunches and busts tend to be longer and deeper What might this mean for recent developments in the US? Signs of a slowing economy but also an aggressive monetary policy stance already in place. Not clear whether this will be a mid-cycle slowdown or recession 68

69 Some Caveats No causal inferences made or intended as to how financial variables affect macroeconomic outcomes Initial conditions and policy responses affect the path economy follows External conditions, demand and supply shocks matter as well Business cycles have moderated over time 69

70 Future research can focus on Future Research Alternative metrics of economic activity (output gap) Different pattern in financial stress/crisis episodes Interactions with global business cycles and emerging market cycles Micro/corporate behavior around recessions/busts 70

71 Questions & Comments Thank you! M. Ayhan Kose 71