Next week sees a host of central banks vote on monetary policy.
The Reserve Bank of Australia’s board is expected to hold rates on Tuesday. On Wednesday Sweden’s Riksbank, the National Bank of Poland, the Bank of Japan and the Bank of Canada are all set to vote. Read more
I criticise Martin Wolf, my colleague, very rarely. Primarily because I tend to agree with him. I also admire him greatly. Less importantly, public disagreements, such as what is to follow, tend to cause more trouble than they are worth.
That said, Martin’s new-found insistence on calling our current economic woes a depression is silly and dangerous.
The definition of a “depression”
Economists tend to define a recession as two quarters of declining output. A depression is much worse.
It is easiest to explain Martin’s new definition of a recession and a depression in a diagram. In the left panel below the blue and red lines show paths of economic output with the previous peak and the pre-crisis trend shown in dotted black lines. Martin defines a recession as the time period between A and B on the left panel – ie the period when output is declining. He defines a depression in two different ways in his article, both the period (A to C) when output is below the pre-crisis level and (A to D) the period when output is below the trend growth implied before the crisis.
I have a simpler, but less precise definition. The blue line E in the right panel is a recession. It is bad. The red line F is much worse and it is a depression. The difference has no precision but is the difference between bad and awful.