Harvard Econ Prof: 20% chance of a depression

Harvard economics professor Robert J. Barro published an opinion piece in today’s Wall Street Journal, “What Are the Odds of a Depression?,” citing research by himself and Jose Ursua (also of Harvard) for the National Bureau of Economic Research. (See an abstract of Barro and Ursua’s paper for NBER, “Stock-Market Crashes and Depressions,” here.)

Barro and Ursua studied the correlation between stock-market crashes and depressions and determined there is “a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.”

Barro writes:

Looking at all of the events from our 34-country history, we find that there is a 28% probability that a “minor depression” (macroeconomic decline of 10% or more) will occur when there is a stock-market crash. There is a 9% chance that a “major depression” (a fall of 25% or more) will occur when there is a stock-market crash. In reverse, the chance that a minor depression will also feature a stock-market crash is 73%. And major depressions are almost sure to have stock-market crashes (our data show the probability is 92%).

AB — 4 March 2009

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