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What Caused the 1990-1991 Recession?
Abstract
This article decomposes U.S. GDP into components associated with major macroeconomic disturbances in order to identify the likely causes of the 1990 recession. Four types of disturbances--aggregate supply, aggregate spending, money demand and money supply--are identified in the empirical analysis. The results suggest the general slowing of the economy relative to trend prior to the actual downturn was due to restrictive monetary policy. Aggregate spending factors turned contractionary in mid-1990, however, and accounted for most of the subsequent decline in GDP during the rest of 1990.
... On the demand side, we identify four aggregate shocks: an IS shock, a money demand shock, a money multiplier shock, and a shock to a reserve aggregate (interpreted as a monetary policy shock). This specification differs considerably from Shapiro and Watson (1988), who identify only generic IS and LM shocks, and from Gali (1992) and Walsh (1993), who do not distinguish between money multiplier shocks and reserve aggregate shocks but instead identify only a money supply shock. We show later that it is important to disaggregate money supply shocks into money multiplier shocks and reserve aggregate shocks because the timing and magnitude of the effects of these shocks on macroeconomic activity differ. ...
... The theoretical framework of the paper is a relatively simple aggregate demand-aggregate supply model with the IS-LM model underlying aggregate demand. This framework, common to many textbooks, has recently been employed in empirical analyses by Gali (1992) and Walsh (1993). ...
... Note that these shocks do not appear to enhance the "Reagan expansion" that followed the 1982 recession. These points are broadly consistent with Walsh (1993). ...
We estimate and analyze the impact of multiple aggregate demand and aggregate supply shocks in a small macroeconomic model of the economy. The analysis serves two purposes. First, we assess the relative importance of the various shocks in explaining the path of output over the past three decades. Second, we conduct counterfactual policy experiments which show the effects of alternative policies on key macro variables. We find that using the monetary policy tool (reserves or the base) such that constant money growth occurs would have produced superior economic results.
... Due to the 1979 oil shock, Latin American countries faced a debt crisis that contributed to the long-lasting slump in growth of emerging markets and developing economies. In the mid-1990s, world economies were aff ected by the international crisis, which resulted in a downturn of economic activity (Walsh, 1993). As per the above analysis, various dates could be identifi ed when an individual country is aff ected by a crisis. ...
The balanced growth theory and the neoclassical growth model predict that certain macroeconomic variables such as output, consumption, and investment grow at a constant rate. Analytically, it indicates that the consumption-output ratio and the investment-output ratio (termed "great ratios") must be stationary. Moreover, consumption and investment must be cointegrated with output. This paper examines these implications with respect to developed (G7) and emerging (E7) countries using data for the period 1970-2019. The validity of the balanced growth hypothesis (BGH) is tested by using unit root tests (univariate analysis) and cointegration techniques (multivariate analysis) that permits endogenously determined structural breaks. The findings of our univariate analysis suggest limited evidence of the BGH in developed and developing countries. The multivariate analysis exhibits more supportive evidence of the BGH in five developed countries and limited evidence for two developing countries. The study also employs the Westerlund (2006) panel cointegration test with structural breaks to examine the validity of the BGH. Empirical findings validate the BGH for the G7 countries, while it is not validated for E7 countries. In sum, the study promulgates the use of structural breaks in a multivariate setup in testing the BGH to find robust evidence.
... Therefore, the slower growth in these industrialized countries triggered a slowdown in Asia (Rieger, 1986). This weakening of industrialized economies contributed to the 1990s recession in North America as well as in many other industrialized countries (Walsh, 1993). In Europe, we highlight the ERM crisis (Bryon, 1993;Aykens, 2002;Eichengreen and Naef, 2022). ...
This paper examines the relative importance of global, regional, country and idiosyncratic factors as well as the determinants that underpin fluctuations in international trade flows across different regions of the world. Our analysis starts by using a Bayesian dynamic latent factor model (BDFM) to simultaneously estimate the four dynamic factors, followed by the application of Bayesian model averaging to identify the variables that explain the shares of variance. Our key findings are: (i) international factors are the most important in explaining fluctuations in international trade, suggesting that the interconnections between economies and policies/shocks at the regional and global level tend to be more important than country-level factors and (ii) regional integration, particularly when the agreement goes beyond trade in goods, is positively related to the share of the regional factor and inversely related to the importance of the global factor. Furthermore, the regional factor is more important in the case of economically large trade blocks. Overall, our analysis illustrates the usefulness of applying a BDFM model to study the co-movements of international trade series.
... It is interesting to observe that the reduction in the gap between these two components occurred in those phases, whenever there has been any economic slowdown at the global level. For example, the first phase can be traced back to the incident of Economic Crisis in early 1990s, which majorly lasted till 1993 (Walsh, 1993). Similarly, the second phase can be traced back to the economic slowdown, that was probably caused by the collapse of dotcom bubble, and the attack on the World Trade Centre on September 11, 2001 (Emin, 2016). ...
Energy poverty is a critical policymaking problem in the world, while the outlined solutions in academic and policy literature talks about the solutions, without addressing the possible cause of the problem. The interaction between labor and energy market might pave a way to address the issue. Within the context of energy poverty, this interaction might turn out to be a major roadblock in the way to attain the objectives of Sustainable Development Goals (SDGs). From this perspective, this study aims at analyzing the constituents of inequality in access to energy, and in that pursuit, it has employed Kaya-Theil Decomposition method. The study is carried out at the global level over the period of 1990–2019. The study outcomes demonstrate all the inequality components to be rising during the study period. Presence of a possible feedback loop in the association might create the Vicious Circle of Energy Poverty around the globe. This study contributes to the literature by addressing the demand-side dimension of the energy poverty issue, while using the Kaya-Theil Decomposition method as an estimator of demand-side factors. Based on the study outcomes, a policy framework has been recommended, and it is aimed at helping the nations to achieve the objectives of SDG 7, SDG 8, and SDG 10.
... We consider daily returns for IBM stock (IBM) and the historical value-weighted indexes (CRSP) by the Center for Research in Security Price. Based on the definition and research by the National Bureau of Economic Research (NBER) and Walsh (1993), the eight-month period between July 1990 and March 1991 is a recession in the NBER's chronology. After the recession, the 1990s was a period of economic growth. ...
This article studies a new family of bivariate copulas constructed using the unit-Lomax distortion derived from a transformation of the non-negative Lomax random variable into a variable whose support is the unit interval. Existing copulas play the role of the base copulas that are distorted into new families of copulas with additional parameters, allowing more flexibility and better fit to data. We present general forms for the new bivariate copula function and its conditional and density distributions. The properties of the new family of the unit-Lomax induced copulas, including the tail behaviors, limiting cases in parameters, Kendall’s tau, and concordance order, are investigated for cases when the base copulas are Archimedean, such as the Clayton, Gumbel, and Frank copulas. An empirical application of the proposed copula model is presented. The unit-Lomax distorted copula models outperform the base copulas.
... According to the model estimates, the outset of the 90's recession is dominated by a combination of demand and supply shocks increasing from 1990 onward. Walsh (1993) and Blanchard (1993) stress the strong role of adverse demand shocks in the early 90's recession. 12 In contrast, the model attributes the fluctuations of output in 1993 and 1998 to financial shocks. ...
In this thesis, I investigate the implications of financial stress for economic fluctuations along several dimensions. What is it that makes financial crisis so disruptive? What is the role of the banking system in their propagation? How to identify and forecast financial distress? Each chapter brings new elements to complement the literature on these broad questions. In the first chapter of this thesis, written together with Yvan Bécard, we estimate a general equilibrium model where banks can adjust their lending standards for households and firms depending on their ability to liquidate the collateral of their borrowers. We find that collateral shocks, shocks that modify the liquidity of banks’ collateral, explain most of the US business cycle fluctuations for investment, consumption, loan volumes, and the credit spreads. In addition, the collateral shocks resemble measures of bank lending standard as observed over the past 30 years for households and firms. In the second chapter, I develop a model where the banking system is characterized by monopolistic competition and used to study the role of bank competition in the propagation of financial crises. I find that low competition in the banking system can dampen the impact of financial stress in situations where monetary policy is impeded by the ZLB. In the last chapter, I study the evolution of firm debt choices in response to different types of aggregate shocks. I find that only financial shocks imply opposite movements in bond and loan volumes. I use this result with sign-restriction methods to identify financial shocks in a VAR model. I find that financial shocks identified with bond and loan series explain a large share of the business cycle and especially the two last recessions. I also use the identification strategy to recover a measure of financial stress. This measure allows predicting the evolution of corporate bond spreads.
This article brings sociological theory of governmentality to bear on a longitudinal analysis of American presidential speeches to theorize the formation of the citizen-consumer subject. The 40-year historical analysis which expands through four economic recessions and the presidential terms of Ronald Reagan, William J. Clinton, George W. Bush, and Barack Hussein Obama, illustrates the ways in which the national mythology of American Dream myth has been linked to the political ideology of the state to create the citizen-consumer subject in the United States. The quantitative and qualitative analysis of the data demonstrates first, the consistent emphasis on responsibility as a key moral value albeit meshed with ideals of liberalism and libertarianism at different presidential periods; second, the presidents iteratively link the neoliberal political ideology and the national myth of American dream through a sophisticated morality play myth, where they cast the citizen-consumer as a responsible moral hero on a journey to achieve American dream, and, third, the presidents use three main dispositives – disciplinary, legal and security - to craft the citizen-consumer subject in their response to the economic recessions. The findings extend prior consumer research on consumer subjectivity, consumer moralism, marketplace mythology and politics of consumption.
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