December 31, 2008
The oil shock and recession of 2008: Part 1
This is the first in what I'm planning will be a series of posts discussing the contribution that the energy price spike of 2008 made to our present economic difficulties. In this first installment, I revisit a very interesting research paper on the response of consumer spending to energy price increases written by Lutz Kilian (Professor of Economics at the University of Michigan), and Paul Edelstein (Senior Economist for Decision Economics). I first brought this paper to the attention of Econbrowser readers in the spring of 2007. I thought now would be a good time to take a look at how well the equations in Edelstein and Kilian's paper can describe what we saw happen in the later part of 2007 and first half of 2008.
December 29, 2008
Aggregate Demand and Finance and the Collapse in Trade
The global financial crisis is drying up the financing that firms depend on for trade. That's making the global recession nastier and deeper than it otherwise would be.
As with all kinds of credit these days, financial institutions are making less trade finance available and charging more for it. But the squeeze in trade stands out because it pinches otherwise healthy companies that should be driving a recovery in global commerce. Already, the World Bank predicts trade will contract next year for the first time since 1982.
December 25, 2008
"Stuff Happens": the Bush Administration's Economic Stewardship
As we near the end of the year, and the end of eight years of Bush economic policy, I think it's useful to look back. The White House has recently tangled with the NYT regarding what got us into the current economic crisis  (see also ). This comes on the heels of the Paulson argument that he would not have done anything different, had he known the full extent of the looming crisis. This leads me to wonder how we should view the Bush Administration's stewardship of the economy.
December 24, 2008
Links for 12-24-08
Today I outsource to a couple of links I found interesting:
Dave Cohen on oil prices.
Stephen Gordon on economists' fatal flaw.
James Morley on the need for a new Fed-Treasury accord.
December 22, 2008
ZIRP and the exchange rate...and other macro variables
Several months ago, I discussed the implications of a model of the exchange rate wherein Taylor rule fundamentals -- the output , inflation and exchange rate gaps -- were central (post). In that paper [pdf], I showed that Taylor rule fundamentals outperformed purchasing power parity, interest rate parity, and the monetary model of exchange rates in terms of in-sample fit, at least insofar as the dollar/euro exchange rate is concerned.
December 21, 2008
Federal Reserve balance sheet
Here I survey how we got here, where things currently stand, and what it all means.
December 19, 2008
Fiscal stimulus: the case for block grants
A few thoughts on how the federal government might best implement a fiscal stimulus.
December 18, 2008
Credit Crunch or Not
One of the debates regarding the current financial crisis is whether in fact there is a crisis, or whether in fact the financial system is operating normally. I've been skeptical myself of the "times are normal view", but here is some evidence that the credit crunch is real. The findings also reinforces my view that un-nuanced reliance on highly aggregated volume statistics (e.g., Chari et al. 2008) is likely to result in misleading inferences (See the rejoinder from the Boston Fed's economists). From the conclusion to Tong and Wei (2008) ungated version of Tong and Wei:
December 17, 2008
The other shoe begins to drop
Chrysler LLC, awaiting a federal rescue as its cash dwindles, will shut all 30 of its plants for at least a month starting Dec. 19 as unsold cars and trucks pile up at showrooms.
Ford Motor Co. said it will idle most of its North American assembly plants for the first week of January, while General Motors Corp. said a new factory making engines for the Chevrolet Volt electric car is being delayed to conserve cash.
The cutbacks showed how far automakers are going to save money and prune output in a year in which industrywide U.S. sales are poised to fall to their lowest levels since 1991. GM and Chrysler say they may run out of operating funds in just weeks without emergency U.S. aid.
December 16, 2008
High Frequency Estimates and Forecasts of GDP
High frequency estimates are falling, while consensus forecasts are for a turnaround in 2009H2. First, consider two estimates of GDP released today.
December 15, 2008
Finding the exit
How you think we might get out of our current economic problems has something to do with how you think we got into them in the first place.
The Global Economic Crisis
Here's the video from a panel convened by the University of Wisconsin's Center on World Affairs and the Global Economy (WAGE) on November 20, 2008. Presenting were Alison Alter, Associate Director of WAGE; Mark J. Ready, Professor of Finance, Investment and Banking; Darian M. Ibrahim, J.D., Assistant Professor of Law; Menzie D. Chinn, Professor of Public Affairs and Economics; and Mark S. Copelovitch, Assistant Professor of Political Science and Public Affairs, and Edward Friedman, Professor of Political Science.
My powerpoint presentation was posted here if one just wants the slides.
December 14, 2008
John Taylor on the Federal Reserve
Stanford economics professor John Taylor has a new paper in which he takes aim at recent economic policy, and fires with both barrels, concluding that "government actions and interventions caused, prolonged, and worsened the financial crisis."
December 11, 2008
Incipient Chinese Yuan Depreciation in Context
Plenty of breathless commentary on how Chinese yuan depreciation against the dollar might trigger conflict. From Barrons:
Reality Check for China
By LESLIE P. NORTON
The currency's decline could dampen foreign speculators' enthusiasm
Last week, China's currency, the renminbi, juddered to its biggest one-day decline against the greenback since Beijing began a managed float in 2005.
Says Win Thin, a currency economist at Brown Brothers Harriman: "The prospect of appreciation is off the table for now." Morgan Stanley now expects China to depreciate its currency by 5% to 10% in the coming year. The current rate is 6.88 to the dollar.
December 09, 2008
Predicting the trough and a jobless recovery
Michael Dueker is a senior portfolio strategist at Russell Investments and formerly was an assistant vice president in the Research Department at the Federal Reserve Bank of St. Louis. Michael is also a member of the Blue Chip forecasting panel. In early February 2008, Michael submitted a piece to Econbrowser that correctly predicted the onset of the current recession, using a model-based forecast. We are pleased that that he is now presenting forecasts from the same Qual VAR model concerning the recession's trough date and the magnitude of a jobless recovery to follow, subject to the disclaimer that the content is the responsibility of the author and does not represent official positions of Russell Investments and does not constitute investment advice.
December 08, 2008
Last week was a tough one for the optimists.
December 07, 2008
...is repudiation of the no-nothing-ness of the past. From Bloomberg:
Dec. 7 (Bloomberg) -- President-elect Barack Obama said the nation owes its military veterans "a sacred trust" and named retired four-star General Eric Shinseki to make the U.S. Department of Veterans Affairs "a 21st century" system.
"No one will ever doubt that this former Army chief of staff has the courage to stand up for our troops and our veterans," Obama said at a press conference in Chicago, held on the anniversary of the 1941 attack on Pearl Harbor. "No one will ever question whether he will fight hard enough to make sure that they have the support that they need."
Shortly before the 2003 U.S. invasion to oust Iraqi dictator Saddam Hussein, Shinseki told Congress it would take several hundred thousand troops to stabilize postwar Iraq, more than then-Secretary of Defense Donald Rumsfeld had estimated.
Rumsfeld roundly rejected Shinseki's assessment, insisting the effort could be accomplished with a U.S. commitment of no more than 150,000 troops. He also cut short Shinseki's tenure as chief of staff, which critics of the Bush administration said was punishment for Shinseki's testimony.
December 05, 2008
The Employment Situation in Pictures
Rather than engage in long commentary, I thought a set of pictures would be sufficient to convey the deteriorating macroeconomic situation, at least as reflected in the labor market.
December 03, 2008
Measuring Import Prices: Implications for GDP Growth
A lot of what has happened to GDP growth over the past few quarters has, in a mechanical sense, depended upon developments in the external accounts. In this post, I examine whether mismeasurement of import prices might have induced mismeasurement of economic output. This idea was prompted by hearing a presentation of Nakamura and Steinsson a couple months ago. The abstract to "Lost in Transit: Product Replacement Bias and Pricing to Market":
The auto downturn is very serious
I was running out of vocabulary last month to describe just how bad October was for the domestic automakers. But whatever you want to say about October, November was significantly worse.
December 02, 2008
Greg Mankiw notes some odd behavior this week in the values reported by the U.S. Treasury for the yields on constant-maturity Treasury Inflation Protected Securities.
December 01, 2008
Recession Dating: Some People Are Going to Be Surprised
"The data are pretty clear that we are not in a recession," Council of Economic Advisers Chairman Edward Lazear told a meeting of editors and reporters from the Wall Street Journal and Dow Jones Newswires.
"I would be very surprised if the NBER, looking back at this period, would date this as a recession," Mr. Lazear said. There are even indications that revised first-quarter estimates would be slightly stronger than 0.6%. "The optimists seem to have been closer to right on that than the pessimists," he said.
Just to reiterate, that quote is from May 2008.
Podcast on the Federal Reserve
I did a long interview today with Tom Keene of Bloomberg Radio on the current recession and Federal Reserve policy. You can listen to it by clicking here.
The Business Cycle Dating Committee of the National Bureau of Economic Research announced today that the eleventh U.S. postwar recession began in December of 2007.