Centennial Repeat of History: Testing the Veracity of Reinhart and Rogoff Model

Horan, Peg; Ononiwu, Ifeanyi Timothy
September 2010
Review of Business;Fall2010, Vol. 31 Issue 1, p98
Academic Journal
Financial crisis seems to be an intrinsic part of an economic cycle and system. When one occurs, it cuts deeply into the gains previously secured. If anticipated, perhaps proper protective measures could be taken to soften the impact. Reinhart and Rogoff (2008) have developed a Five Element Model (FEM) as a predictor of financial crisis. The five variables are housing prices, equity prices, current account balance as a percentage of gross domestic product (GDP), real GDP growth per capita and public debt. The objective of this paper is to test whether the FEM could have been able to predict the 1907 financial crisis, which occurred in a pre-Federal Reserve environment. This is a unique application since Reinhart and Rogoff's FEM was only tested on post-Federal Reserve crises. This analysis shows compelling parallels in conditions leading up to the 1907 crisis to those of other crises, suggesting a reasonable conclusion that the FEM has effectiveness that is also relevant in the pre-Federal Reserve era.


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