Global shocks, economic growth and financial crises: 120 years of ...

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NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 May 2010

Some of this material is drawn from a lecture given by Michael Bordo during his Professorial Fellowship at the Reserve Bank of New Zealand in July 2009. We would like to thank Ozer Karagedikli, Gary Hawke, Chris Hunt, Chris Meissner, John Singleton and an anonymous referee for comments or advice; the usual disclaimer applies. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2010 by Michael D. Bordo, David Hargreaves, and Mizuho Kida. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

Global shocks, economic growth and financial crises: 120 years of New Zealand experience Michael D. Bordo, David Hargreaves, and Mizuho Kida NBER Working Paper No. 16027 May 2010 JEL No. G01 ABSTRACT We identify the timing of currency, banking crises and sudden stops in New Zealand from 1880 to 2008, and consider the extent to which empirical models can explain New Zealand’s crisis history. We find that the cross country evidence on the determinants of crises fits New Zealand experience reasonably well. A number of the risk factors that correlate with crises internationally–such as domestic imbalances, external debt, and currency mismatches–were elevated for New Zealand when the country had more frequent crises and have improved in the recent (more stable) period. However, a time-series analysis of New Zealand growth over 120 years shows that global factors–such as the US growth rate and terms of trade–explain New Zealand growth fairly well, and that crisis dummy variables do not have significant additional explanatory power. This suggests that having sound institutions and policies may help avoid severe domestic crises, but will not be sufficient to avoid the domestic economic impact of the global business cycle.

Michael D. Bordo Department of Economics Rutgers University New Jersey Hall 75 Hamilton Street New Brunswick, NJ 08901 and NBER [email protected] David Hargreaves Reserve Bank of New Zealand P.O. Box 2498, Wellington New Zealand [email protected]

Mizuho Kida Reserve Bank of New Zealand P.O. Box 2498, Wellington New Zealand [email protected]



The shocks that New Zealand has recently faced in an environment of increasing globalisation of the world economy - integration in both goods and finance - have resonance to the first era of globalisation in the years 1880-1913. Globalisation has been associated with an increased incidence of financial crises including banking crises, currency crises, debt crises and sudden stops.2 Also along with globalisation business cycles have become increasingly synchronised across countries. They have become connected by common global shocks which are often financial in nature. In such an environment, a small open economy can be hit hard by financial crises leading to recessions. It can also be hit by real shocks that reduce its terms of trade and the volume of its exports. What factors can prevent global shocks from being so damaging? In this paper, we look at the crisis history of the New Zealand economy, and consider how international cross-country evidence on the determinants of crises fits that history. This allows us to identify factors that appeared to increase New Zealand’s susceptibility to certain sorts of crisis at cer