Rare disasters in the persistence of growth

by on August 26, 2014 at 1:53 am in Uncategorized | Permalink

An MR reader refers me to this interesting paper (pdf) by Max Gillman, Michal Kejak, and Michal Pakoš, the abstract is here:

Rietz (1988) and Barro (2006) subject consumption and dividends to rare disasters in the growth rate.  We extend their framework and extent consumption and dividends to rare disasters in the growth persistence.  We model growth persistence by means of two hidden types of growth slowdowns: recessions and lost decades.  We estimate the model based on the postwar U.S. data using maximum likelihood and find that it can simultaneously match a wide array of dynamic pricing phenomena in the equity and bond markets.  The key intuition for our results stems from the inability to discriminate between the short and the long recessions ex ante.

In essence there is tail uncertainty about the length of the recession.

Ray Lopez August 26, 2014 at 3:11 am

This is why I say the 19th century was superior to the 20th and 21st: short, sharp recessions followed by sharp recoveries, as opposed to the comatose Keynesian prescription. Total growth (area under the curve, not just looking at the peaks and troughs) was about the same as now. Or, alternatively, it could be the economy back then was more dynamic due to structural factors (technological low hanging fruit).

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Peter Schaeffer August 26, 2014 at 1:31 pm

RL,

“This is why I say the 19th century was superior to the 20th and 21st: short, sharp recessions followed by sharp recoveries, as opposed to the comatose Keynesian prescription.”

Factually incorrect. See http://www.nber.org/cycles.html. From 1854 to 1919 contractions lasted an average of 18.2 months. From 1919 to 1945 they lasted an average of 18.2 months. From 1945 to 2009 they lasted an average of 11.1 months. Recessions were clearly longer in the pre-Keynesian period. There is some suggestion that they were deeper as well.

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Daniel August 26, 2014 at 6:03 am
Ray Lopez August 26, 2014 at 6:08 am

@ Daniel – you talking to me? Lern to post properly, under the Reply link.

The Long Depression was in fact a beneficial era of both falling prices, real GDP growth and prosperity. See the works by Gary Shilling deflation About 27,100 results (0.32 seconds)

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Ray Lopez August 26, 2014 at 6:12 am

Or if you don’t like Shilling, see Friedman et al: “As economists Friedman and Schwartz have noted, the decade from 1869 to 1879 saw a 3-percent-per annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. “

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Jc August 26, 2014 at 10:32 am

Would you rather live in the 19th or 21st century? I think it was Johnson who declared “I refute it thus”.

In the later 19th century the economies had enormous unexploited opportunities from the advances in chemistry, physics and steel making. There were enormous gains to be had from spreading literacy. Bouncing back was easier when you had such strong underlying growth factors.

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JC August 26, 2014 at 11:26 am

“the decade from 1869 to 1879 saw … an outstanding real national product growth of 6.8 percent per year”

Probably almost entirely the result of the introduction of the Bessemer process.

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Peter Schaeffer August 26, 2014 at 2:57 pm

JC and RL,

GDP growth from 1869 to 1879 was 4.97% per year (from Measuring Worth). The Bessemer process was never really that important because it only worked with certain limited ores. However, the related Thomas-Gilchrist process was widely used for many decades. In any case, steel making was too small a share of GDP to account for growth from 1869 to 1879.

Peter Schaeffer August 26, 2014 at 2:29 pm

RL,

The Davis index of industrial production peaks in 1873 at 302.17 (up from 190.11 in 1865). It then falls to 284.2 in 1875 and then rises to 297.8 in 1877. Given population growth, IP per-capita was obviously lower in 1877 than 1873. After 1877 recovery starts and IP grows to 356.4 in 1879 and 523.8 in 1883.

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Spencer August 27, 2014 at 12:04 pm

According to Shiller’s Irrational Exuberance data, the S&P peaked at 6.24 in March,1881
and did not surpass that peak until March, 1889.

The lows were 4.08 in August, 1893 and 3.81 in August, 1896

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Spencer August 27, 2014 at 12:06 pm

I prefer to use per capita GDP in looking at the 1800s because so much of the earlier growth was due to rapid population growth.

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Spencer August 27, 2014 at 12:13 pm

From 1860 to 1880 smoothed real per capita GDP growth was below its 2 % long term trend growth rate.

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