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Carmen M. Reinhart - This Time Is Different: Eight Centuries of Financial Folly

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Throughout history, rich and poor countries alike have been lending, borrowing, crashing--and recovering--their way through an extraordinary range of financial crises. Each time, the experts have chimed, this time is different--claiming that the old rules of valuation no longer apply and that the new situation bears little similarity to past disasters. With this breakthrough study, leading economists Carmen Reinhart and Kenneth Rogoff definitively prove them wrong. Covering sixty-six countries across five continents, This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes--from medieval currency debasements to todays subprime catastrophe. Carmen Reinhart and Kenneth Rogoff, leading economists whose work has been influential in the policy debate concerning the current financial crisis, provocatively argue that financial combustions are universal rites of passage for emerging and established market nations. The authors draw important lessons from history to show us how much--or how little--we have learned.

Using clear, sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallouts occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts--as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur.

An important book that will affect policy discussions for a long time to come, This Time Is Different exposes centuries of financial missteps.

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THIS TIME IS DIFFERENT THIS TIME IS DIFFERENT Eight Centuries of - photo 1

THIS

TIME

IS

DIFFERENT

THIS
TIME
IS
DIFFERENT

Eight Centuries
of Financial Folly

CARMEN M. REINHART
KENNETH S. ROGOFF

Princeton University Press
Princeton and Oxford

Copyright 2009 by Princeton University Press
Published by Princeton University Press, 41 William Street,
Princeton, New Jersey 08540
In the United Kingdom: Princeton University Press, 6 Oxford Street,
Woodstock, Oxfordshire OX20 1TW

All Rights Reserved

Library of Congress Cataloging-in-Publication Data

Reinhart, Carmen M.
This time is different : eight centuries of financial folly /
Carmen M. Reinhart, Kenneth S. Rogoff.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-691-14216-6 (hardcover : alk. paper)
1. Financial crisesCase studies. Fiscal policy
Case studies. Business cyclesCase studies.
I. Rogoff, Kenneth S. II. Title.
HB3722.R45 2009
338.5'42dc22
2009022616

British Library Cataloging-in-Publication Data is available

This book has been composed in Goudy text
with Trade Gothic and Century italic by
Princeton Editorial Associates, Inc., Scottsdale, Arizona

Printed on acid-free paper.

press.princeton.edu

Printed in the United States of America

1 3 5 7 9 10 8 6 4 2

To William Reinhart,
Juliana Rogoff,
and Gabriel Rogoff

C ONTENTS

PART I
Financial Crises: An Operational Primer

1
Varieties of Crises and Their Dates

2
Debt Intolerance: The Genesis of Serial Default

3
A Global Database on Financial Crises with a Long-Term View

PART II
Sovereign External Debt Crises

4
A Digression on the Theoretical Underpinnings of Debt Crises

5
Cycles of Sovereign Default on External Debt

6
External Default through History

PART III
The Forgotten History of Domestic Debt and Default

7
The Stylized Facts of Domestic Debt and Default

8
Domestic Debt: The Missing Link Explaining External Default and High Inflation

9
Domestic and External Default: Which Is Worse? Who Is Senior?

PART IV
Banking Crises, Inflation, and Currency Crashes

10
Banking Crises

11
Default through Debasement: An Old World Favorite

12
Inflation and Modern Currency Crashes

PART V
The U.S. Subprime Meltdown and the Second Great Contraction

13
The U.S. Subprime Crisis: An International and Historical Comparison

14
The Aftermath of Financial Crises

15
The International Dimensions of the Subprime Crisis: The Results of Contagion or Common Fundamentals?

16
Composite Measures of Financial Turmoil

PART VI
What Have We Learned?

17
Reflections on Early Warnings, Graduation, Policy Responses, and the Foibles of Human Nature

T ABLES

Defining crises: A summary of quantitative thresholds

Defining crises by events: A summary

External debt at the time of default: Middle-income countries, 19702008

External debt at the time of default: Frequency distribution, 19702008

Risk and debt: Panel pairwise correlations, 19792007

Countries share of world GDP, 1913 and 1990

The early external defaults: Europe, 13001799

External default and rescheduling: Africa, Europe, and Latin America, nineteenth century

Default and rescheduling: Africa and Asia, twentieth century to 2008

Default and rescheduling: Europe and Latin America, twentieth century to 2008

The cumulative tally of default and rescheduling: Africa and Asia, year of independence to 2008

The cumulative tally of default and rescheduling: Europe, Latin America, North America, and Oceania, year of independence to 2008

Interest rates on domestic and external debt, 19281946

Selected episodes of domestic debt default or restructuring, 17401921

Selected episodes of domestic debt default or restructuring, late 1920s1950s

Selected episodes of domestic debt default or restructuring, 19702008

Debt ratios at the time of default: Selected episodes

Inflation and domestic public debt: Selected episodes, 19171994

Output and inflation around and during debt crises

Who gets expropriated, residents or foreigners? Preliminary tests for the equality of two proportions (binomial distribution), 18002006

Debt and banking crises: Africa and Asia, year of independence to 2008

Debt and banking crises: Europe, Latin America, North America, and Oceania, year of independence to 2008

Frequency of banking crises: Africa and Asia, to 2008

Frequency of banking crises: Europe, Latin America, North America, and Oceania, to 2008

Summary of the incidence and frequency of banking crises, 1800 (or independence) to 2008

Summary of the incidence and frequency of banking crises, 1945 (or independence) to 2008

The effect of a capital flow bonanza on the probability of a banking crisis in a sixty-six country sample, 19602007

Cycles of real housing prices and banking crises

Creative accounting? Bailout costs of banking crises

Expropriation through currency debasement: Europe, 12581799

Expropriation through currency debasement: Europe, nineteenth century

Default through inflation: Asia, Europe, and the New World, 15001799

Default through inflation: Africa and Asia, 18002008 184

Default through inflation: Europe, Latin America, North America, and Oceania, 18002008

PostWorld War II bank-centered financial crises in advanced economies

Fiscal deficits (central government balance) as a percentage of GDP

Global banking crises, 18902008: Contagion or common fundamentals?

Indexes of total building activity in selected countries

Unemployment rates for selected countries, 19291932

Early warning indicators of banking and currency crises: A summary

Institutional Investor ratings of sixty-six countries: Upgrade or demotion, 19792008

Prices: Consumer or cost-of-living indexes

Modern nominal exchange rates

Early silver-based exchange rates

The silver content of currencies

Index of nominal and real gross national product and output

Gross national product

Central government expenditures and revenues

Total exports and imports

Global indicators and financial centers

Real house prices

Stock market indexes (equity prices)

Public debentures: External government bond issues

Total (domestic plus external) public debt

External public debt

Domestic public debt

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