Thursday, March 5, 2009

Barro On the Chance of a Depression

Scary research from Robert Barro on the op-ed page of the March 4 issue of The Wall Street Journal.

He got data going back to 1870 from 33 countries on 251 stock market crashes and 97 downturns that he labels depressions (depression is not a technical term with a fixed definition, so he classifies any decline in per capita GDP of more than 10% as a depression). He does this because:

The U.S. macroeconomy has been so tame for so long that it's impossible to get an accurate reading about depression odds just from the U.S. data.

He finds that 3/4 of depressions are associated with stock market crashes, but that only 1/4 of stock market crashes occur with a depression. This translates to:

There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.

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