Post on 26-Dec-2015
The Financial and Economic Crisis
Lecture Two: How the crisis affected the US and world economies
Mike Kennedy
The epicentre of the storm, the US economy
What happened in some individual OECD economies…
19851986
19871988
19891990
19911992
19931994
19951996
19971998
19992000
20012002
20032004
20052006
20072008
20092010
20112012
20132014
20152016
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
Output gaps
Great recession Canada
Japan United Kingdom
United States Euro area (15 countries)
OECD - Total
Source: OECD Economic Outlook database and IMF (for UK)
… and in the euro area
19851986
19871988
19891990
19911992
19931994
19951996
19971998
19992000
20012002
20032004
20052006
20072008
20092010
20112012
20132014
20152016
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
Output gaps
Great recession Austria BelgiumDenmark Finland FranceGermany Italy NetherlandsPortugal Spain
Source: OECD Economic Outlook database
Risk aversion spiked during the crisis
Credit conditions were affected by the spike in risk…
… as was the outlook for activity
A driving factor were house prices (nominal) which fell (almost) everywhere
1990:1
1990:4
1991:3
1992:2
1993:1
1993:4
1994:3
1995:2
1996:1
1996:4
1997:3
1998:2
1999:1
1999:4
2000:3
2001:2
2002:1
2002:4
2003:3
2004:2
2005:1
2005:4
2006:3
2007:2
2008:1
2008:4
2009:3
2010:2
2011:1
2011:4
2012:3
2013:2
2014:10
1
2
3
4
5
6
USAJPNDEUFRAITAGBRCANAUSGRCIRLKORNLDESPSWECHE
One offshoot of the housing boom: the US economy (and others) became unbalanced, with the share of
construction rising in importance
But this wasn’t just a US phenomenon – Spain, Greece and Ireland stand out as seeing a rise in the importance of housing in their economies
Another look at housing investment in the OECD
Based on past experience, a decline in house prices would have negative effects
• A house price downturn, when it occurs, or even just a stabilization of prices, could: – affect consumption through reduced housing equity
withdrawal and effects on perceived wealth, – be exacerbated by ratios of household debt to income which
are at historical highs in several countries. • The historical record suggests that in the case of a major
housing downturn, spill-over effects may be large, with consumption and GDP growth on average falling from around 4% prior to a housing peak to practically nil after it.
• As well, with low inflation, a correction in “real” house prices would be long and slow.
A look at housing investment
20002001
20022003
20042005
20062007
20082009
20102011
20122013
20142015
2016
-50
-40
-30
-20
-10
0
10
20
30
40
GreeceIreland
AustraliaCanadaFranceGermanyGreeceIrelandItalyJapanKoreaNetherlandsSpainSwedenSwitzerlandUnited KingdomUnited States
Business confidence plunged …
Dec-2004
Apr-2005
Aug-2005
Dec-2005
Apr-2006
Aug-2006
Dec-2006
Apr-2007
Aug-2007
Dec-2007
Apr-2008
Aug-2008
Dec-2008
Apr-2009
Aug-2009
Dec-2009
Apr-2010
Aug-2010
Dec-2010
Apr-2011
Aug-2011
Dec-2011
Apr-2012
Aug-2012
Dec-2012
Apr-2013
Aug-2013
Dec-2013
Apr-2014
Aug-2014
95
96
97
98
99
100
101
102
103
RecessionAustraliaJapanUnited KingdomUnited StatesEuro area (18 countries)
… and non-residential investment also declined but nowhere to the extent of residential
structures
20002001
20022003
20042005
20062007
20082009
20102011
20122013
20142015
2016
-50
-40
-30
-20
-10
0
10
20
30
AustraliaCanadaFranceGermanyJapanNetherlandsSwedenSwitzerlandUnited KingdomUnited States
Real consumption also fell but not like housing
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
20142015
2016-10
-5
0
5
10
15
AustraliaCanadaFranceGermanyGreeceIrelandItalyJapanKoreaNetherlandsSpainSwedenSwitzerlandUnited KingdomUnited States
The outlook for family incomes played a role in the US
Household balance sheets were weakened…
y-2002 y-2003 y-2004 y-2005 y-2006 y-2007 y-2008 y-2009 y-2010 y-2011 y-2012-25
-20
-15
-10
-5
0
5
10
15Net wealth
RecessionCanadaFranceGermanyItalyJapanUnited KingdomUnited States
Per c
ent c
hang
e
… in part by a fall in housing wealth
y-2002
y-2003
y-2004
y-2005
y-2006
y-2007
y-2008
y-2009
y-2010
y-2011
y-2012
-20
-15
-10
-5
0
5
10
15
20
Non-financial wealth
RecessionCanadaFranceGermanyItalyJapanUnited KingdomUnited States
Per c
ent c
hang
e
World trade collapsed…
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
20142015
201630
30.2
30.4
30.6
30.8
31
31.2
31.4
31.6
Recession
ln(Total trade volume)
The volume of world trade (total exports and imports) fell by 11% during the recession
… with both exports and imports hit hard
19911992
19931994
19951996
19971998
19992000
20012002
20032004
20052006
20072008
20092010
20112012
20132014
20152016
-15
-10
-5
0
5
10
15
Recession
∆ln(Total exports)
∆ln(Total imports)
Intentions to hire driven by the outlook for sales
Unemployment rates rose virtually everywhere…
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
20142015
20160
5
10
15
Unemployment rates
RecessionAustraliaCanadaJapanKoreaUnited KingdomUnited StatesEuro area (15 countries)OECD - Total
… but especially in the euro area
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
20142015
20160
5
10
15
20
25
30
Greece
Ireland
Spain
Unemployment rates in the euro area
RecessionFranceGermanyGreeceIrelandItalyNetherlandsSpainEuro area (15 countries)OECD - Total
Not much of the problem was structural …
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
20142015
20160
2
4
6
8
10
12
14
16
18
20
NAIRU
RecessionAustraliaCanadaJapanKoreaUnited KingdomUnited StatesEuro area (15 countries)
… except in certain parts of the euro area and only later
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
20142015
20160
2
4
6
8
10
12
14
16
18
20
Greece
Ireland
Spain
NAIRU
RecessionFranceGermanyGreeceIrelandItalyNetherlandsSpainEuro area (15 countries)
Cyclical unemployment rose during the recession in non-euro area economies
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
20142015
2016-8
-6
-4
-2
0
2
4
6
8
10
12
Cyclical unemployment
RecessionAustraliaCanadaJapanKoreaUnited KingdomUnited StatesEuro area (15 countries)
Cyclical unemployment also rose in the euro area but after the recession!
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
20142015
2016-8
-6
-4
-2
0
2
4
6
8
10
12
Greece
Ireland
Spain
Cyclical unemployment
RecessionFranceGermanyGreeceIrelandItalyNetherlandsSpainEuro area (15 countries)
Did unusually high house prices foreshadow sharp drops in those prices? Not that well this time
Did the high real house prices foreshadow the depth of the recessions? Not really. We need to look elsewhere for that –
to a banking system that was being transformed
Mortgages became an increasing share of total bank loans in the US …
… with subprime mortgages growing in importance…
… but mortgage delinquency rates were low up until 2007
Euro debt markets were affected
Credit restraint also affected euro area government bond rates but uncertainty was likely more important
Euro area is still in crisis
-5
0
5
10
15
20
25
30
Greece
Ireland
Portugal
Spain
Differential with Germany(long-term interest rates) Recession
Austria
Belgium
Czech Republic
Denmark
Finland
France
Greece
Ireland
Italy
Netherlands
Portugal
Slovak Republic
Spain
Was being a member of the euro a problem: Swedish (red line) and Finnish (blue) long-term interest rates
Jan-2005
Apr-2005
Jul-2005
Oct-2005
Jan-2006
Apr-2006
Jul-2006
Oct-2006
Jan-2007
Apr-2007
Jul-2007
Oct-2007
Jan-2008
Apr-2008
Jul-2008
Oct-2008
Jan-2009
Apr-2009
Jul-2009
Oct-2009
Jan-2010
Apr-2010
Jul-2010
Oct-2010
Jan-2011
Apr-2011
Jul-2011
Oct-2011
Jan-2012
Apr-2012
Jul-2012
Oct-2012
Jan-2013
Apr-2013
Jul-2013
Oct-2013
Jan-2014
Apr-2014
Jul-2014
Oct-2014
0
1
2
3
4
5
6
RecessionFinlandSweden
Emerging markets get hit through the financial channel
Sep-01
Dec-01
Mar-02
Jun-02
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
50
150
250
350
450
550
650
750
850
Response of Some Emerging Market Bond Spreads During the Crisis
BRA BUL COL INDMEX PAN PER PHLRUS SAF TUR
Key emerging market GDPs were affected, with some seeing large negative growth
20002001
20022003
20042005
20062007
20082009
20102011
20122013
20142015
2016-15
-10
-5
0
5
10
15Recession
Brazil
China (People's Republic of)
Colombia
India
Indonesia
Latvia
Russia
South Africa
Dynamic Asian Economies
Other oil producers
A typical economic time series
Some scary stuff: An error correction mechanism
€
yt = μ +λyt−1 +γ1xt +γ2 xt−1
y t = α −βxt
α =μ
1−λ; β =
γ1 +γ 2
1−λyt − yt−1 = μ − yt−1 +λyt−1 +γ1xt +γ 2xt−1 +γ2 xt −γ 2xt
Δyt = −(1−λ ) yt−1 −μ
1−λ−
γ1 +γ2
1−λxt
⎡
⎣ ⎢ ⎤
⎦ ⎥−γ 2Δxt
Δyt = −(1−λ )[yt−1 −α +βxt ]−γ 2Δxt