Financial crises: similarities and differences

Jan Zilinsky

• Introduction
• Visualization 1
  Macroeconomic effects of the past 71 crises
• Visualization 2
  An animation of country default (bankruptcies) from 1826 to 2005.
• Visualization 3
  How frequent are recessions and house price declines in G7 countries?

Project write-up

Motivating question

Do economic crises have things in common? For example, does GDP always fall? Do government revenues always suffer in the years following a recession?

The key finding is that while crises have some things in common (savings rate tends to be low, poorer countries are more likely to fall into a crisis than rich ones and geography matters: a country in Latin America is more likely to experience a crisis in any given year) but the trajectory of most crises is unpredictable.

As we can see today, no country is immune to macroeconomic turbulences. Three visualizations that I present here attempt to make this point visually.

Data Sources

I have used various World Bank, IMF and Economist Intelligence Unit to compile a master dataset of macroeconomic data. For crisis years, length and location, I relied heavily on a dataset by Professors Rogoff (Harvard) and Reinhart (University of Maryland). Naturally, all variables (inflation, savings rate, GDP, government revenues) have their traditional meaning. A recession is loosely defined as an economic slowdown (or contraction, though not necessarily) a banking crisis means that banks are dysfunctional (on national level) and a default means that country is bankrupt (it can no longer pays its debt).

Design choices

Since economic storms can be approached on various levels, I chose to create THREE applets. The first shows relatively recent crises (starting in the 1960s) and attempts to show (through a scatter plot or "bubble chart") the effects of banking crises on inflation, savings rate, GDP and government revenues. The user can isolate countries by region and see a detailed trajectory of GDP growth or decline when he or she clicks on an observation. My guiding principle was "more detail on demand." The bubble size shows either savings rate or GDP (before, during or after crisis: the user can choose) and the color shows inflation in the year of crisis. Simply mousing over an observation also provides more detail about the selected country. I also used animation to show how the positions of countries change when one chooses to view different years.

Before the visualization starts, a textual introduction introduces the user to the key features. Although this applet probably includes more text than most (this might admittedly annoy some users), I sought to ensure that the user can truly understand what happens after every mouse click. Perhaps less hand-holding would improve this applet, but I chose the safer side (I tried to balance clarity and the ease of use and found that sometimes there is a trade-off. I certainly hope the users will not find the visualization too cluttered.)

The second and third applets are described more closely on separate web pages.

Observations and insights

As alluded to earlier, one can learn several specific things about each country using the main applet. Additionally, the big picture is that crises (generally) have little in common: they occur on most continents, they have various (often unpredictable) effects on GDP as well as savings rate and government revenues. The effect on prices (shown through color) is also heterogenous and poor countries tend to show up more frequently that countries which are already developed. In this sense, the present global recession is unusual, because it his Western countries particularly hard. My main applet tells a brief story about 71 distinct crises, but its overall message is that every country reacts to a crisis differently (though many Asians countries have been able to deal with crises reasonably well).

The experience and scope for improvement

I enjoyed designing all applets, although the second one (an animation of a succession of defaults) was most frustrating because it was difficult to encode the position of all countries and to ensure that the applet would show an animation and not an incomprehensible mess; hopefully, it is at least a partial success by now. I am pleased with the main visualization because it can almost be used as a learning tool for interesting economists: it contains various pieces of information on a large number of crises.

As alluded to earlier, the first visualization could be clearer: I indexed the variables to 100 exactly four years before a crisis, but maybe I should have elected to show percentage change over various years. The second visualization could be more interactive: ideally, the user would be able to choose not only when the animation ends but also when it begins (or to see a pithy snapshot of a desired time period).

Lastly, the third applet is meant to give a brief overview of the past recessions in the mot developed countries (and I like the way the change of phenomenon is animated), but the visualization would be more valuable to the user if it contained more information about every country than the four variables (not including position.)

Overall, I hope that these visualizations show an appropriate amount of information about a timely topic and that they CONVICE people that recessions always end. Perhaps a hopeful message is not communicated when so many crises are shown at once: but the story inherent in every single crisis is that it eventually ended.

 

Credits: I am thankful to the CS171 teaching staff for helpful advise and to Karen Feng whose project inspired me to create multiple visualizations of a subject in which I am interested and whose website design I have closely imitated. I am also grateful to Kenneth Rogoff and Carmen Reinhart for their fascinating data.