# The Crane Test

Last week I was visiting Rio and I had a blast when Brazil was granted the 2014 world cup. Of course, after some short spree of happiness, my Venezuelan genes started to kick in, and started to complain. In particular, I started whining about how expensive Rio was, and was going to get. Students in front of me said “so, is it because the exchange rate is appreciated?”.

“Wow!” I responded, “The issue is that Rio failed the Crane test, so that can’t be the reason”.

Immediately all the students started searching in their heads for all the papers written by authors Crane, Krane, Crain, Qranne, and whatever combination you can imagine that could remotely sound as crane; when I said,

“No, not a person. Construction cranes! The crane test.”.

They looked quite confused. Roughly as confused you are looking now. But the crane test is perhaps one of the most powerful policy tools available to human kind. Some people say that I invented it, but I know I didn’t. In any case, I do use it a lot, and I am kind of the promoter.

The crane test consists of the following: every time I am driving from the airport to the city I count the number of tall buildings and the number of tall cranes. I take the ratio. If this ratio is close to one, the exchange rate is appreciated.

The counting is not very scientific. First, what is a tall building? Well, it changes from city to city. By looking at the skyline you can clearly see how many jut or stand out. The average building depends on geological characteristics, and country income; and every city has its own tall buildings. Usually, just by driving around you can count them. Second, by counting the number of tall cranes and divide it by the number of tall buildings we have an easy measure of the non-tradable expansion in the city – and therefore, a magnificent measure of the real exchange rate. The measure does not have to be exact. I remember in Oslo I got more than 2 cranes for every tall building. I know you can make mistakes counting but at those orders of magnitude the mistakes are irrelevant.

In Rio, there are very few cranes. I mean, there were some cranes for the stadiums, but truly, no significant number of them. The students actually thought about it and agreed with me. They said, however, that in Sao Paolo the crane test will indicate a real exchange rate appreciation.

I thought that there is an interesting opportunity here. Lets use this blog to report the crane test in each city in Latin America (every month), and then we compare it to measures of the real exchange rate issued by the IMF. We’ll collect the data from the blog, and then report statistics about the countries. I think it might be interesting. Lets see how many responses we get for this plead, and then we’ll continue. IMPORTANTLY: when reporting report the number of tall buildings and number of cranes. We can compute the ratio…

Finally, I know the crane test is the perfect measure, so we will be truly evaluating the IMF’s data and the big mac. The worst that can happen is that we find a great correlation and produce a better measure.

Furthermore, now that Brazil was awarded the 2014 world cup (CONGRATULATIONS by the way) they need the roads, trains, transportation, stadiums, housing, etc. We can predict a lot of expenditures on non-tradables in the years to come, which should appreciate the exchange rate, and should show up in cranes…. Lets the counting begin!

### 10 Responses to "The Crane Test"

1. Vitoria Saddi   November 9, 2007 at 10:37 am

Roberto, It is a good idea to have the Rigobon crane test. Totally in favor of it. When the planes to Brazil are totally booked (and it is low season) you can be sure that the exchange rate is overvalued. But your measure is broader.Let’s do it!!Vitoria

2. Guest   November 9, 2007 at 12:49 pm

Roberto,you are way cool as usual. You should cross-post this entry in the Asian Blog. I was in Shangai last year and my impression is that crane ratio there was close to one. If this is indeed true (but I may be I am wrong) you can use it to argue that the RMB is not undervalued as the US claim. The Chinese could then use your finding to argue against pressure to appreciate and then woudl give you the Légion d’Honneur (well that’s France, but they could give you the Chinese equivalent)Ugo

3. jo6pac   November 9, 2007 at 9:20 pm

I don’t travel at all but when I’m in the City (SF, Cal.)the cranes are how I measure jobs for the region. I see no reason this couldn’t be used in the way you are talking. I’ll be back to see how the investigation is going.At lest the students listened to your idea, here they would’ve been to busy Ipodding/gaming.jo6pac

4. Javier Finkman   November 10, 2007 at 9:31 am

Roberto:And what would be the transmission mechanism implied by the Crane test? I imagine that an overvalued exchange rate will brought about a sharp revaluation of assets in dollar terms and will be easy seen in a highly pro-cyclical industry such as construction… :)

5. Guest   November 10, 2007 at 10:11 am

Very good post, Roberto. Congratulations. Here in Spain there are cranes everywhere so I guess our real exchange rate is overvalued (although the economic activity is starting to lose gas)Vem cá, Vitoria, did you mean planes from Brazil when you said planes to Brazil?Regards

6. Qingdao   November 11, 2007 at 7:06 am

The Ubiqidous Crane is the national bird in China

7. roberto rigobon   November 11, 2007 at 6:42 pm

Thanks so much for alo the encouragement. The transmission mechanisms is the usual demand driven real exchange rate appreciation. and i agree it can be use to assess labor demand in countries or cities – which in the end reflect wage presures and real exchange rate appreciations.if i am called as an expert witness for the dispute between us and china regarding real exchange rate, i will use the crane test. do you think the judge will held me in contempt?lets start reporting the crane test.i just returned from brussels and i realized that the crane test has a major weakness. it can only be used if the weather cooperates. in belgium the weather was so bad that you couldn’t see 200 meters away. i could even tell if the stuff in front of me were buildings… forget about cranes. so, when you are going around reporting the crane test do so in a good day….thanks. best. rr.

8. Vitoria Saddi   November 14, 2007 at 3:01 pm

Guest, I meant planes from Brazil. Forgive me for the typo.Guest, quem e’ voce? Abracos,Vitoria

9. Anonymous   November 16, 2007 at 10:38 pm

This is ridiculous. Have you ever been to New York? Count the cranes. See the exchange rates…

10. Roberto Rigobon   November 18, 2007 at 10:45 am

Actually in NY the crane test mens that the city is close to equilibrium. And by the way, I think it is not an unreasonable assumption for NY. In fact, the US prior to this slow down had a huge boom in construction in all the cities – which would have tell the crane test to be bigger than one and predict a depreciation. I was in NY three weeks ago and there are some construction but it doesn’t look like 2000. am i correct?best. rr.