This Time is Different by Carmen Reinhart and Kenneth Rogoff makes the point that although the recent financial crisis is severe by historical standards, it has many features that are similar to other financial crisis over the last 200 years. The authors point out that during a run-up in stock or housing prices, pundits, politicians, and economists will often offer explanations as to why the current asset price boom is sustainable and will not end in a crash and recession. In the case of the current financial crisis, the authors point out that many of the world's leading economists, including former Federal Reserve Chairman Alan Greenspan, believed that the growing U.S. current account deficit was not a problem because of the deepening of global financial markets. Once again, the “this time is different” argument made by investors and policymakers has been proven wrong and the global economy is in the midst of recovering from the worst financial crisis since the Great Depression.

This Time is Different is divided into five parts with 17 chapters. Part I is devoted to defining the meaning of different types of crises, the concept of debt default, and describing the new database. The core database, which covers 66 countries, is probably the most comprehensive collection of data on sovereign debt and financial crises. The database will undoubtedly serve as an important resource for future studies. In the second part of the book, the authors review the history and incidence of sovereign external debt default and crisis since 1300 drawing on the work of economic historians and international economists. The analysis of external debt default is followed by a section on the forgotten history of domestic debt. This section is probably the most important contribution of the book. Reinhart and Rogoff show that domestic debt is an important source of finance even for emerging markets. This stylized fact is likely to lead to many new theoretical models and empirical studies that revisit old (but important questions) questions given that economists have generally ignored domestic debt in their analysis. For example, one long-standing puzzle in many studies of hyperinflation is that some countries seem to print more money than a revenue maximizing model would suggest. Reinhart and Rogoff provide some interesting evidence that this puzzle may no longer be true once domestic debt is taken into account. Governments may print money not only to gain seignior age, but also to reduce their (domestic and external) real debt burden. It will be interesting to see if this prediction holds for the Hungarian and recent hyperinflation in Zimbabwe, two of the largest episodes of hyperinflation in modern history that are not covered in the book.

The fourth part of the book examines banking crises, inflation, and currency crashes. An interesting result from this section is that both developing and developed countries are prone to banking crises. This is quite different from sovereign debt default, where many countries including Austria and France have graduated from a status of serial defaulter to countries with good credit ratings over the last several hundred years. The authors also find that a sustained surge in capital inflows tends to precede a banking crisis. A boom-bust cycle in the real estate sector is another empirical finding that frequently accompanies a banking crisis. As for inflation crises, Reinhart and Rogoff make the point that episodes of inflation are not confined to Latin America or Africa. Indeed, the Asian tigers and many European countries experienced periods of high inflation during the twentieth century.

Part V of the book focuses on the recent/ongoing financial crisis. The authors compare the recent U.S. subprime mortgage crisis with other large postwar banking crisis. They show that U.S. real housing prices and stock prices declined significantly more in the recent crisis than in five of the most severe financial crises since the 1970s. Their analysis indicates that real government debt rises dramatically during a banking crisis which can be attributed primarily to a drop in tax revenues rather than to the costs of bailout and recapitalizing the banking system. Reinhart and Rogoff conclude the section by developing a composite index of financial turbulence that takes into account the number of different types of crises (sovereign debt, inflation, banking, etc.) that a country experiences in a given year.

The final section examines the lessons learned from a study of historical financial crises. One important lesson from the history of financial crises is that policymakers need to worry about asset prices and bubbles in financial markets. Central banks and/or regulatory authorities need to pay closer attention to credit markets than they have in the past. Excessive leverage often leads to a financial crisis. The authors argue that international institutions such as the IMF need to collect economic data on domestic debt (and encourage countries to report this information) and other early warning indicators so that policymakers have a better idea of the extent of global leverage that can help predict future crises.

Although This Time is Different offers an unparalleled analysis of sovereign debt and financial crisis in terms of breadth and coverage, there are a few issues that I would have liked to see covered or explored in greater detail. First, I would argue that although financial crises may share many common features in the terms of the behavior of economic variables before, during, and after a crisis, wars are different. For example, suppose that a country is invaded by Nazi Germany during World War II and the country defaults on its debt and turns to the printing press and financial repression as a means of finance. Economic policy during wartime is driven by maximizing the probability of winning the war. It would be interesting to know how the empirical analysis in the book would be different if the authors eliminated every incidence of war (civil war, world war) that led to a sovereign debt default or financial crisis. It is quite possible that the macroeconomic impact of financial crises would be significantly smaller once wars are eliminated from their sample. If wars are driving the results or are a very important part of the story, then this might suggest a very different policy prescription. To the extent that wars are important, this might suggest that political factors and foreign policy might play a key role in reducing the incidence of future financial crises.

Reinhart and Rogoff discuss the two main economic theories as to why countries repay their debts. In a classic paper, Eaton and Gersovitz (1981) argue that countries repay their foreign debts to maintain a good international capital market reputation so that they can borrow in the future. The other model, developed by Bulow and Rogoff (1988), argues that reputation is not a sufficient condition for repayment. Rather, countries repay because there is a threat of sanctions such as a reduction in trade credits or an embargo. While I am very sympathetic to the Bulow-Rogoff model, I am still waiting for an international economist to provide a detailed list of modern examples where creditors have seized the assets of sovereign debt defaulters or punished them through an embargo or reduced their trade credits. Reinhart and Rogoff also point to historical work by Tomz (2007) that England often intervened on behalf of creditors to promote debt repayment by sovereign debt defaulters. As discussed in a Journal of Economic Literature survey article on sovereign debt default by Panizza, Sturzenegger, and Zettelmeyer (2009), Tomz (2007) strongly believes that reputation is a sufficient condition for repayment and believes that there are few, if any, examples of debt sanctions. Rather, Reinhart and Rogoff should have looked at work by Mitchener and Weidenmier (2005) that catalogs the different types of “supersanctions” employed by creditors to punish serial debt defaulters during the classical gold standard period.

I was also surprised to see that there was little discussion about the size and determinants of haircuts (debt write-downs) following debt renegotiations between a sovereign debt defaulter and its creditors given that every default is different. While it is true that data on haircuts are difficult to come by, there have been a couple of recent and important historical studies that have assembled some of this data. Esteves (2007), for example, has collected data on the size of haircuts for sovereign debt defaults for much of the nineteenth century and early twentieth century including the classical gold standard period. Sturzenegger and Zettelmeyer (2007) have assembled data on the size of haircuts for the recent period of globalization. I am unaware of haircut data for the period between World War I and the recent period of globalization, however. Nevertheless, it would have been interesting if the authors had included at least a discussion of the determinants of haircuts and their economic impact given that every default is different. In any event, I think that it is possible that this study will inspire a future study to assemble long-run data on sovereign hair cuts that would be beneficial to policymakers, creditors, and economists.

This Time is Different is an important and timely book on the history of financial crises. The authors have accomplished a rare feat; they have written a book that is not only accessible to academic economists, policymakers, and the general public, but will also inspire future theoretical models and empirical studies. Anyone with an interest in the causes and consequences of financial crises will learn a tremendous amount by reading this book. Perhaps if policymakers knew a little more financial history, the recent global meltdown could have been avoided, or at least mitigated to some degree.