October 31, 2009
On Revisions and on Conditioning
Both have to be "handled with care".
We're all tempted to make predictions on the basis of the last data point. And even more difficult to resist is the temptation to make definitive statements on the basis of data that are sure to be revised. For instance, we see this question from Casey Mulligan, "Where's the GDP Disaster?".
Last October, when we were told that spending and incomes were about to collapse, I predicted that "real GDP will not drop below $11 trillion (chained 2000 $)."
October 29, 2009
A welcome GDP report
The Commerce Department reported today that the seasonally adjusted real value of the nation's production of goods and services grew at a 3.5% annual rate during the third quarter, a little better than the 3.2% average seen since 1947.
The 2009Q3 Advance GDP Release and Stimulus Measures
The 3.5% growth rate was, in my view, in large part attributable to direct measures to stimulate the economy, including direct spending on goods and services by the government (Federal, state and local), as well as tax measures. First, let's take a look at how each category of final demand accounted for total growth, in the context of a mechanical decomposition, in Figure 1.
October 28, 2009
Futures As Predictors of Commodity Prices
As commodity prices start rising again -- at least some -- the question of whether futures are useful indicators seems relevant. Figure 1 shows the IMF commodity price indices, as reported in the October World Economic Outlook:
October 27, 2009
Improving financial regulation and supervision
There were some other very interesting presentations at the conference hosted by the Federal Reserve Bank of Boston last week. Fed Chair Ben Bernanke spoke on Financial Regulation and Supervision after the Crisis while Princeton Professor Alan Blinder's message was It's Broke, Let's Fix It: Rethinking Financial Regulation. Here I summarize four key reforms these speakers addressed.
October 26, 2009
The National Saving Identity: Private Saving, Household Saving, and Rebalancing
The National Saving Identity states:
CA ≡ (T-G) + (S-I)
Where CA is the current account, (T-G) is the consolidated government budget balance, and (S-I) is the private sector saving-investment balance. Figure 1 depicts the profound shifts that have occurred in these components (normalized by nominal GDP).
October 25, 2009
Evaluating the new tools of monetary policy
Last week I participated in a conference hosted by the Federal Reserve Bank of Boston, at which I discussed the new lending programs and asset acquisitions pursued by the Federal Reserve over the last two years. Previously I shared with Econbrowser readers empirical evidence on the effects these targeted liquidity operations seem to have had. Below I reproduce my remarks from the conference on the underlying motivation for using such measures, in which I suggested that the critical question is what was the underlying cause of the financial stress to which the Fed was responding. I distinguished between two possible interpretations of how the financial crisis arose.
October 22, 2009
The Political Economy of Recovery and Rebalancing
Jeffry Frieden, Professor of Government at Harvard, has a new Council of Foreign Relations working paper "Global Imbalances, National Rebalancing, and the Political Economy of Recovery" :
Global macroeconomic imbalances -- massive borrowing by some countries and massive lending by others -- drove the financial boom and bubble that eventually burst into the current crisis. There is now nearly universal agreement that such imbalances cannot be sustained, and that the former deficit and surplus nations need to move toward macroeconomic balance.
October 21, 2009
One Interpretation of Recession Causes... with Really Long and Really Variable Lags
In an Economix post today, titled "The Panic of '08: Recession Cause or Effect?" Professor Mulligan writes:
...recent research questions the claim that the financial panics themselves contributed to their contemporaneous and severe employment downturns.
October 20, 2009
Unemployment and inflation
Does high unemployment mean that there's nothing to worry about in terms of inflation?
October 19, 2009
Guest Contribution: East Asian Production Networks, Global Imbalances, and Exchange Rate Coordination
By Willem Thorbecke
Today, we're fortunate to have Willem Thorbecke, Senior Research Fellow at Asian Development Bank Institute and a Consulting Fellow at Japan's Research Institute of Economy, Trade and Industry, as a guest contributor.
Asia's role in the propagation of the global recession has been a subject of study, but relatively little attention has been devoted to the interaction of exchange rates and production chains. The structure of East Asian production networks and the severity of the recession places a premium on policy coordination in the region.
October 18, 2009
Real output grew significantly this quarter. Will employment follow?
October 15, 2009
Dollar Demise and Double Dip: Latest Forecasts
I thought it of interest to see what surveys of forecasters indicate about two questions being asked: Is a dollar collapse imminent -- Martin Wolf is skeptical, while others  are convinced the end is nigh -- and is a double dip recession likely? I take a look at the messages conveyed by FX4casts.com and the WSJ October survey of forecasters.
October 14, 2009
Targeted liquidity operations
During the last two years, the Federal Reserve responded to problems in the financial markets through what I have described as monetary policy using the asset side of the Fed's balance sheet, replacing its traditional holdings of Treasury securities with a variety of new lending programs and alternative assets. I've been taking a look at what effect these operations seem to have had on the problems they were designed to address.
October 12, 2009
Two Views: Blame It on Beijing Redux, or Joint Determination
From the abstract to Why are we in a recession? The Financial Crisis is the Symptom not the Disease!, by Ravi Jagannathan, Mudit Kapoor, and Ernst Schaumburg:
...We argue that the large increase in the developed world's labor supply, triggered by geo-political events and technological innovations, is the major underlying cause of the global macro economic imbalances that led to the great recession. ...
October 11, 2009
Working harder and harder to keep oil production from falling
The challenges for private oil companies to increase oil production are pretty daunting.
October 08, 2009
Trade Procyclicality in the Current Recession: The View from the US
Paul Krugman recently characterized the current pace of trade activity as worse than that during the Great Depression. And indeed, Barry Eichengreen and Kevin O'Rourke have been diligent in illustrating how this is the case, most recently in this September VoxEU post. Caroline Freund ([pdf] here) as well as the IMF in its most recent World Economic Outlook (Box 1.1) attribute the sharp drop-off in world trade to high income elasticities, in part associated with the high degree of vertical integration that characterizes the globalized world economy. Below, I want to examine that explanation from the perspective of the US data. This follows up on several of my recent posts on the subject.    
October 07, 2009
Will stimulating nominal aggregate demand solve our problems?
In which I join the ongoing debate on how much we should expect fiscal and monetary stimulus to accomplish.
October 05, 2009
Guest Contribution: The Wisconsin Foreclosure and Unemployment Relief Plan (WI-FUR)
By Morris A. Davis
Research by economists inside the Federal Reserve system have shown that two events typically lead homeowners to default on their mortgage (see here). First, the value of the house must be less than the value of the mortgage ("under water"). This is necessary but not sufficient (see here). Second, homeowners must experience a significant disruption and loss of income. The available data suggest there might be a big increase in foreclosures in the immediate future. Zillow estimates that 22 percent of the 50 million homeowners with mortgages are currently under water; unemployment rates are high and are expected to remain high for the next two years.
October 04, 2009
"W" and the Stimulus Package in Perspective
In the wake of some recent economic reports, most prominently the employment report, there's some discussion of how the recovery is in doubt , possibly leading to a "W", or double dip, . Anxieties focus on 2010 or possibly 2011. I think, in retrospect, such worries cast the criticisms of the stimulus bill in a different light than just a few months ago.
October 03, 2009
Not much of a V
The latest auto and employment numbers paint a picture of an economic recovery that remains tepid and potentially fragile.