Macrofinancial imbalances in historical perspective: A global crisis index

Abstract

Global crisis episodes are “rare events” that can be properly studied by adopting the long run view of macroeconomic history. In this study we explore the strength of the relationship between current account imbalances, credit growth and equity returns at global level and document new evidence of a recurring sequencing pattern ahead of global crisis periods where credit booms are preceded by growing external imbalances, and crisis episodes occur at the low end of the contraction phase of equity returns. We use this information to construct a single aggregate measure with the aim of signaling periods of increasing risk of macroeconomic and financial instability at global level. Three major crisis episodes are identified with our global crisis index: the 1929 crisis, the breakdown of the Bretton-Woods system and the recent financial crisis. Since past global crisis episodes at international level culminated with the collapse of existing international monetary systems, the ongoing debate on the reforms needed to enhance the stability of international financial markets indicates the recent global financial crisis as a major turning point in the evolution of the international financial and monetary system.