IN 1987, the unemployment rate in Massachusetts averaged 3.2 percent, three percentage points below the national rate. Only four years later, in 1991, it stood at 9.0 percent, more than two points above the national rate. For firms taking investment decisions and for unemployed workers thinking about relocating, the obvious question is whether and when things will return to normal in Massachusetts. This is the issue that we take up in our paper. However, instead of looking only at Massachusetts, we examine the general features of regional booms and slumps, studying the behavior of U.S. states over the last 40 years. We attempt to answer four questions. When a typical U.S. state over the postwar period has been affected by an adverse shock to employment, how has it adjusted? Did wages decline relative to the rest of the nation? Were otherjobs created to replace those jobs destroyed by the shock? Or did workers move out of the state? Our interest in these questions extends beyond regional economics. Blocs of countries, notably those in the European Community, are increasingly eliminating barriers to the mobility of goods and factors and moving toward adopting a common currency. Once these institutional changes are in place, economic interactions among these countries will more closely resemble those of U.S. states. This paper offers at least a We thank Rachel Friedberg, Jae Woo Lee, and especially Bill Miracky for research assistance. We thank Timothy Bartik,

SummaryThe crisis problem is one of the dominant macroeconomic features of our age. Its prominence suggests questions like the following: Are crises growing more frequent? Are they becoming more disruptive? Are economies taking longer to recover? These are fundamentally historical questions, which can be answered only by comparing the present with the past. To this end, this paper develops and analyzes a data base spanning 120 years of financial history. We find that crisis frequency since 1973 has been double that of the Bretton Woods and classical gold standard periods and is rivaled only by the crisis-ridden 1920s and 1930s. History thus confirms that there is something different and disturbing about our age. However, there is little evidence that crises have grown longer or output losses have become larger. Crises may have grown more frequent, in other words, but they have not obviously grown more severe. Our explanation for the growing frequency and chronic costs of crises focuses on the combination of capital mobility and the financial safety net, including the implicit insurance against exchange risk provided by an ex ante credible policy of pegging the exchange rate, which encourages banks and corporates to accumulate excessive foreign currency exposures. We also provide policy recommendations for restoring stability and growth.

This paper uses graphical techniques and multinomial logit analysis to evaluate the causes and consequences of episodes of turbulence in foreign exchange markets. Using a quarterly panel of data from 1959 through 1993 for twenty OECD countries, we consider the antecedents and aftermath of devaluations and revaluations, flotations, fixings, and speculative attacks (which may not be successful). We find that realignments of fixed exchange rates are alike: devaluations are preceded by political instability, budget and current account deficits and fast growth of money, and prices. Revaluations are mirror images of devaluations. These movements are largely consistent with the standard speculative attack model. In contrast, few consistent correlations link regime transitions like flotations or fixings to macroeconomic or political variables. Transitions between exchange rate regimes are largely idiosyncratic, and are neither consistently provoked ex ante by systematic imbalances, nor typically justified ex post by subsequent changes in policy. We conclude that there are no clear early warning signals of many speculative attacks, and no easy solutions for policy-makers.

FISCAL DISCIPLINE is currently the main macroeconomic problem faced by industrial and developing countries. Following the fiscal profligacy of the 1970s and early 1980s, deficit reduction has dominated the political economy debate during the past few years. The United States, after experiencing mounting deficits in the early and mid-1980s, has recently achieved a balanced budget. In Latin America, several countries show a marked improvement in their budget balances since the "lost decade" of the 1980s, although it remains to be seen how permanent these adjustments are.' In Europe, inflation is stable and low, and most countries joining the European Monetary Union (EMU) have easily satisfied the convergence criterion on inflation, but achieving the fiscal targets has proved a more difficult task.2 Deficit reduction policiesWe are grateful to our discussants, Barry Eichengreen and Maurice Obstfeld, and to the other participants of the Brookings Panel meeting for helpful and constructive comments. We also thank Olivier Blanchard, Benjamin Friedman, Xavier Gabaix, and participants of seminars at Harvard University, Boston College, and the Istituto per la Programmazone Economica in Rome for useful suggestions. We are grateful to Teng Chamchumrus for excellent research assistance and Silvia Ardagna for help with the data. Alesina and Perotti are grateful to the National Science Foundation for a grant through the National Bureau of Economic Research, and Tavares acknowledges financial support from the Banco de Portugal and the Fundac,ao para a Ciencia e Tecnologia in Lisbon.1. For a discussion of fiscal policy in Latin America, see Gavin and Perotti (1997). For an excellent discussion of the process of European integration and the convergence criteria for EMU, see Obstfeld (1997). 198Brookings Papers on Economic Activity, 1:1998 are almost always associated with politically charged issues, such as the retrenchment of overextended welfare states, the reform of insolvent public pension systems, and the trimming of large and inefficient bureaucracies.The textbook view, embraced by most policymakers, is that to reduce budget deficits is contractionary, at least in the short run. Since a recession is a major electoral liability, governments hesitate to pursue fiscal adjustments. However, recent research casts doubt on this seemingly unquestionable "stylized fact."3 Is it accurate, then, to say that fiscal adjustments are a political liability?In this paper we reexamine the research on the economic effects of fiscal adjustments. Not all fiscal consolidations are contractionary: some are and some are not. In particular, we emphasize that the composition of the adjustment matters. We confirm and extend evidence that fiscal corrections relying mostly on spending cuts that are concentrated on government wages and transfers tend to be expansionary, whereas those relying mainly on tax increases are contractionary.The second and main purpose of the paper is to investigate whether governments that follow tight fiscal policies ten...

, and the editor and anonymous referees of this review. 2 The intertemporal approach to capital mobility owes its origins to Fisher (1930). Influential modern treatments which resuscitated this approach and summarized its implications include (1981) and Frenkel and Razin (1996).

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