This Time Is Different
Eight centuries of default and crisis data assembled in one place.
Summary
Reinhart and Rogoff assembled a database covering sixty-six countries across eight centuries of sovereign defaults, banking crises, inflation crises, currency crashes and debt levels, and use it to argue that financial crises follow recurring quantitative patterns that participants each time believe do not apply to them.
The empirical findings are the contribution. Serial default is normal rather than exceptional, and countries that default once tend to default repeatedly over long periods. Domestic debt, which prior research largely ignored because the data was hard to assemble, is substantial and changes the interpretation of default decisions. Banking crises share a common sequence in which capital inflows, asset price rises and credit expansion precede the collapse, and they are followed by an average fall in real housing prices of thirty-five percent over six years, a fall in equity prices of about fifty-six percent, a rise in unemployment of seven percentage points, and an increase in real government debt of around eighty-six percent driven mainly by collapsing revenue rather than by rescue costs.
The title refers to the belief that recurs before every crisis, that the current expansion rests on different and sounder foundations than previous ones.
The growth and debt threshold finding, that growth slows sharply above ninety percent debt to GDP, was found in 2013 to contain a spreadsheet error and selective weighting by Herndon, Ash and Pollin. The correction weakened the threshold claim substantially, and it had been used to support austerity policy. The rest of the database and the crisis aftermath findings survived that episode and remain the standard reference.
Key takeaways 8
- Financial crises follow recurring quantitative patterns across centuries and across very different institutional arrangements.
- Serial default is normal, and countries that have defaulted once are substantially more likely to default again over long horizons.
- Domestic debt is large and was ignored by earlier research, which changes the interpretation of why governments default when they do.
- Banking crises follow a common sequence of capital inflows, asset price appreciation and credit expansion before the collapse.
- After a banking crisis, real housing prices fall around thirty-five percent over six years and equity prices around fifty-six percent.
- Government debt rises around eighty-six percent after a banking crisis, driven mainly by collapsing tax revenue rather than by the cost of rescues.
- Every expansion produces the belief that its foundations are sounder than previous ones, which is the mechanism the title names.
- The finding about a ninety percent debt threshold for growth contained a spreadsheet error and does not survive correction, though the rest of the work does.
Who should read it
Investors and policy readers who want the empirical base on crisis frequency and aftermath, with the debt threshold finding treated as withdrawn.
Where it sits in the reference 4
Who recommended it 4 · 2 direct
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