Saturday, October 20, 2012

Time, time, time

Isn't on your side, no, it isn't, say four European economists (Berman,de Sousa, Martin, and Mayer, if there's a financial crisis (Reihnart and Rogoff, call your offices);
In our research we find that the fall in international trade caused by financial crises is magnified by the time needed to ship goods between the origin and the destination country.
....even in normal times there is an opportunity cost to time that can be measured broadly by the cost of capital.
  • During a financial crisis, time to ship widens exposure to financial mishap in the importing firm and thus raises the chance of non-payment.
Long delays are never good but they can be especially bad when the financial health of the buyer is up in the air.
  • Crucially, time to ship does not in this case simply represent an extra cost – it increases the elasticity of exports to the expected cost of default. 
Time to ship therefore magnifies the negative effect of financial crises on trade. 
Not that this has much, if anything to do with the spat in the econosphere among Reinhart, Rogoff, Krugman, Taylor, Bordo et al over the expected recovery times from recessions, but some remarks from commenter Mark Sadowski at The Money Illusion are too well put to not deserve some mention;
Well, R&R’s definition of financial crisis mostly deals with things that aren’t relevant to the US Great Recession. They identify five kinds of financial crisis: 1) external sovereign default, 2) domestic sovereign default, 3) exchange rate crisis, 4) inflation crisis and 5) banking crisis. Thus their definition of financial crisis is primarily focused on issues involving public debt (exchange rate crisis and inflation crises can be a form of sovereign default), and the most serious crises nearly always involve current account reversals. The US Great Recession may have boosted public debt levels, but even R&R classify it only as a banking crisis, and if anything the global financial crisis has led to an inflow of foreign capital seeking safety. Furthermore, only a small fraction of the cases examined by R&R are banking crises involving high income countries under high capital mobility. Thus it’s not clear to me how relevant most of R&R’s research is to the US Great Recession.
...if you restrict yourself to US financial crises, even limiting yourself to R&R’s list, the current recovery is weak even correcting for trend (I’ve looked at this in terms of both NGDP and RGDP). And if you include the 1974 and 1982 recession, which is not as an outrageous idea as I initially thought, it looks even worse. More importantly, I’m not even sure what the direction of causality from recession to financial crises is, provided one can even agree on an appropriate definition of “financial crisis” with respect to the US.
I’ve always felt that what has made the current recession so bad are the poor monetary, fiscal and regulatory policies that led to it, and the poor policy responses to it. In my opinion the evocation of R&R’s “This Time is Different” has almost always been simply an excuse to do nothing.  

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