Search Results from Econbrowser
Persistent Large Output Gaps, Disinflation and Deflation
Or, what if the Accelerationist hypothesis doesn't hold. I'm sure this question will drive some apoplectic -- but I think it a reasonable question. First, let's look at the empirical evidence on what happens to inflation in the wake of persistent large output gaps. Fortuitously, Andre Meier has just written on this subject, in Still Minding the Gap:
Posted in Econbrowser on August 12, 2010 07:32 AM
Ever so slightly less contractionary
What is the significance of yesterday's statement from the FOMC?
Posted in Econbrowser on August 11, 2010 08:37 AM
Contagion, Re-examined
For a while, contagion had dropped off the (research) map. But it's now back (thanks to Greece et al!), in both research and policy arenas. A new symposium published in Pacific Economic Review covers the topic.
Posted in Econbrowser on August 5, 2010 04:34 PM
Conference: China in the Global Economy
Recently, I had the pleasure of participating in a CES-ifo workshop on "The Evolving Role of China in the Global Economy," co-organized by Yin-Wong Cheung and Jakob de Haan. The conference agenda is here. The paper topics spanned issues ranging from monetary independence and integration into global financial markets, SOE access to credit and SOE efficiency, Chinese saving/consumption behavior, econometric models of China-global interactions, and the determinants of Chinese FDI in the rest-of-the-world.
Posted in Econbrowser on July 28, 2010 04:43 PM
Guest Contribution: Should central banks target higher rates of inflation?
By Olivier Coibion, Yuriy Gorodnichenko, and Johannes Wieland
Today, we're fortunate to have Oli Coibion, and Yuriy Gorodnichenko, Professors of Economics at William and Mary and at UC Berkeley, respectively, and Johannes Wieland, Ph.D. candidate at UC Berkeley, as a Guest Contributors.
Posted in Econbrowser on July 19, 2010 04:23 PM
Who's buying all that debt?
I've been taking a look at what happened to the demand for U.S. Treasury bills and bonds as a result of the financial crisis. Here's a summary of some of the data that I found interesting.
Posted in Econbrowser on July 11, 2010 08:24 AM
Bob Hall on financial frictions
Via Mark Thoma and Arnold Kling, the Federal Reserve Bank of Minneapolis published an interview with Stanford Professor Robert Hall. The interview is terrific not just because Bob is a very smart guy, but also because interviewer Douglas Clement did a great job choosing the right questions. The whole thing's worth reading, but I wanted to focus today on Bob's comments on the role of financial frictions in the crisis and policy options to address them.
Posted in Econbrowser on July 6, 2010 07:23 PM
Inflation or deflation?
For the last year and a half my assessment has been that the near-term pressures on the U.S. economy were deflationary, while long-term fundamentals involve significant inflation risks. It's time for a look at the data that have come in over the last 6 months, and time to say that I still see things exactly the same way.
Posted in Econbrowser on June 20, 2010 06:08 AM
Is Spain Next?
Today, we're fortunate to have Mark Copelovitch, Assistant Professor of Political Science and Public Affairs at the University of Wisconsin, as a Guest Contributor.
First off, let me thank Menzie for the opportunity to "pinch hit" here at Econbrowser. It's a pleasure to be here. I am Menzie's colleague in the La Follette School of Public Affairs here at Wisconsin (as well a professor in the Political Science department), and my primary area of expertise is the politics of international finance.
Posted in Econbrowser on June 17, 2010 07:17 AM
Global Imbalances and the Crisis
In today's VoxEU, Kati Suominen asks "Did global imbalances cause the crisis?, and surveys the arguments. I recently wrote a survey on the same topic for the forthcoming Encyclopedia of Financial Globalization. Here's my take, from the introduction:
Posted in Econbrowser on June 14, 2010 12:23 PM
Toxic assets and toxic oil
In some ways the Gulf of Mexico oil spill seems like a replay of the subprime lending disaster. Clever technological innovations blew up in a mess that nobody knew how to control, wreaking devastation on those innocently standing by. The actors and the scenes have changed, but you can't shake the feeling you've been through this nightmare before.
Posted in Econbrowser on June 9, 2010 05:09 AM
Macroeconometrics in the Mountains
I'm just back from a two day conference at the Norges Bank's conference center in the mountains north of Oslo (organized by Karsten Gerdrup, Christian Kascha, Francesco Ravazzolo and Dagfinn Rime). For me as an end-user of econometric methods, this was a great experience. I got to see some recent developments in applying time series methods to problems in macro and finance (and to see Norway for the first time). Here were some of the papers presented and discussed (I've omitted the papers that are not posted online).
Posted in Econbrowser on June 7, 2010 04:50 PM
The (Macro) World at Your Fingertips
Or, at least the G-20 at your fingertips.
Eswar Prasad (Cornell and Brookings) and Karim Foda have put together a new website, "TIGER: Tracking Indexes for the Global Economic Recovery".
In collaboration with the Financial Times (FT), Eswar Prasad and Karim Foda of Brookings have developed a set of composite indexes which track the global economic recovery. The Financial Times has produced the Tracking Indexes for the Global Economic Recovery (TIGER) interactive map, which appears on the FT Web site.
Posted in Econbrowser on May 26, 2010 09:40 PM
What Does a Euro Depreciation Mean for the US?
The euro has been depreciating against the dollar over the past few weeks. The implications of this development for the US depend critically on (1) the extent of the depreciation, (2) the duration, and (3) the source of the depreciation. (See Jim's post for other links.)
Posted in Econbrowser on May 20, 2010 10:12 PM
The European bailout
As Europe and the IMF announce close to a trillion dollar rescue package, Megan McArdle asks, what's the benefit to the countries providing the funding? Here are my thoughts.
Posted in Econbrowser on May 12, 2010 09:08 AM
Quantifying Macro Spillovers
In a post regarding the transmission of financial turmoil from Europe to the US last week, I noted my research with Kristin Forbes on the determinants of the strength of financial market linkages. A more recent and extensive survey of the macroeconomic -- as opposed to financial -- linkages is provided by a recent released working paper coauthored by Ashoka Mody and Alina Carare at the IMF.
Posted in Econbrowser on May 10, 2010 08:00 PM
Why Adam ate the apple
In my last post, I discussed how the run-up of U.S. mortgage debt during the last decade was funded. One important element was the sale of commercial paper that helped fund the purchase of some mortgage-related securities. Here I comment on why it was hard for some institutions to resist buying that commercial paper.
Posted in Econbrowser on April 28, 2010 07:24 AM
Follow the money
What happened to housing and financial markets over the last decade? To find out, follow the money.
Posted in Econbrowser on April 25, 2010 01:14 PM
The Post-Crisis Global Economy: Prospects for Recovery and Reform
Join a distinguished panel of speakers, including Jeffry Frieden, Stanfield Professor of International Peace, Department of Government, Harvard University, Menzie Chinn, Professor of Economics and Public Affairs, and Michael Knetter, Albert O. Nicholas Dean, Wisconsin School of Business, for a discussion of pressing questions facing the global and U.S. economies in the aftermath of the crisis. Moderated by Mark Copelovitch, Assistant Professor of Political Science & Public Affairs.
Posted in Econbrowser on April 12, 2010 07:14 PM
Links for 2010-04-07
A few items from the 'sphere that you might find interesting.
Posted in Econbrowser on April 7, 2010 09:04 AM
Robert Samuelson on Economics
And on unavoidable spending, and debt crises, and on budget accounting...
From the Washington Post: comes this headline:
With health bill, Obama has sown the seeds of a budget crisis
Posted in Econbrowser on March 29, 2010 09:16 AM
A Misalignment Primer
As the release of the next Treasury Report to Congress on International Economic and Exchange Rate Policies looms, it might be useful to recount the various ways in which different observers define currency "misalignment".
Posted in Econbrowser on March 23, 2010 12:20 PM
Obama after One Year: Crisis, Response, Recovery
A couple days ago, I presented my views on the policy response to the financial crisis and the Great Recession in a UW Center for World Affairs and the Global Economy / UW CIBER / MITA and ICE sponsored event. The power point slides are here (big file, 1.3MB). I took the latitude as the invited speaker to expand the topic from the Obama Administration's measures to encompass the response to the crisis and recession from both the fiscal and monetary policy authorities.
Posted in Econbrowser on March 18, 2010 06:15 AM
Bank supervision and the Federal Reserve
In testimony today before Congress, Fed Chair Ben Bernanke outlined his reasons why the Federal Reserve is uniquely suited to be the regulatory supervisor for U.S. banks.
Posted in Econbrowser on March 17, 2010 10:33 AM
The Global Financial Crisis: Explaining Cross-Country Differences in the Output Impact
From "The Global Financial Crisis: Explaining Cross-Country Differences in the Output Impact," IMF WP 09/280, by Pelin Berkmen, Gaston Gelos, Robert Rennhack, and James P. Walsh:
We provide one of the first attempts at explaining the differences in the crisis impact across developing countries and emerging markets. Using cross-country regressions to explain the factors driving growth forecast revisions after the eruption of the global crisis, we find that a small set of variables explain a large share of the variation in growth revisions. ...
Posted in Econbrowser on March 4, 2010 11:15 AM
The Fed's discount rate hike
The Federal Reserve Board announced on Thursday that it is raising the interest rate at which banks borrow from the Fed's discount window to 0.75%, a 25-basis-point increase, and intends to return discount lending primarily to the traditional overnight loans. "The rate hike cycle begins," declared 24/7 Wall St, and Business Week reported:
Treasuries fell, pushing yields to the highest levels in at least five weeks, amid concern the Federal Reserve's increase in the discount rate signaled policy makers are moving closer to lifting benchmark borrowing costs.
But I don't believe that's what the discount rate hike means at all.
Posted in Econbrowser on February 20, 2010 01:39 PM
Macroeconomic Advisers: On the Stimulus Package
P>From today's Macroeconomic Advisers blogpost, by Joel Prakken:
Frequently, partisan commentators -- and even some economists -- exclaim that the stimulus has failed because the unemployment rate now exceeds the peak shown in projections prepared before ARRA was implemented. This argument, which clearly -- and perhaps intentionally -- confuses the pre-stimulus baseline with the incremental effects of the stimulus, would be laughable if it was not taken so seriously in some quarters. For the record, last spring, as the financial crisis that engulfed the economy worsened unexpectedly -- but before the stimulus could possibly have had any real effect on the economy -- the unemployment rate already had moved above the Administration's (and many others') last pre-stimulus projection. So, this is simple: the baseline forecasts were optimistic, but unemployment would be even higher now without the benefit of the stimulus package.
Posted in Econbrowser on February 19, 2010 12:02 PM
Forecasts Compared
How does the Administration's forecast of the levels of real GDP compare against those of the CBO, and the Blue Chip and Wall Street Journal surveys?
Posted in Econbrowser on February 3, 2010 06:15 PM
John Cochrane on the credit crisis
University of Chicago Professor John Cochrane (hat tip: Capital Spectator) has an interesting analysis of the causes of the financial problems of the last few years.
Posted in Econbrowser on January 31, 2010 06:34 AM
"No rate hikes likely in 2010..."
Despite the somewhat startling conclusion (at least to me), the implications are pretty straightforwardly arrive at. From Michael Rosenberg, Financial Conditions Watch (Bloomberg, Jan. 27, 2010) (link added 1/29 8am) [not online]:
Fed Funds Rate Outlook -- A Taylor Rule Perspective
With U.S. real GDP growth moving back into positive territory in the second half of 2009 following four consecutive quarters of negative growth (see Figure 1), the economic forecasting community appears to be increasingly optimistic about the U.S. economy's growth prospects for 2010-11....
Posted in Econbrowser on January 28, 2010 02:57 PM
G-7 Consumption Behavior and Global Rebalancing
Or, the end of the consumption follows a random walk view.
Following up this post last week on Lee et al., here is another, cross-country analysis of consumption behavior. From the abstract to "After the Crisis: Lower Consumption Growth but Narrower Global Imbalances?" by Ashoka Mody and Franziska Ohnsorge:
Posted in Econbrowser on January 27, 2010 07:50 PM
Links for 2010-01-13
Stuart Staniford, who earlier had been persuaded that global oil production might have already peaked, now comments on the potential for increased production from Iraq to push the peak up to a decade down the road.
King Banaian on disturbing developments...
Posted in Econbrowser on January 13, 2010 06:59 AM
Marsh and Pfleiderer on the Financial Crisis
From "Analysis of the 2008-2009 Financial Crisis", by Terry Marsh and Paul Pfleiderer:
In this Preface, we offer some analysis of the 2008-2009 financial crisis and its implications for financial industry reform and research. We primarily focus on issues relating to transparency and the measurement of risk and how these are affected by management incentives that are often misaligned with the incentives of those who are exposed in various ways to the risk being measured. In the aftermath of the crisis many have called for increased transparency; we suggest that while transparency is no doubt a desirable goal in many ways, enhancing it could prove to be quite difficult.
Posted in Econbrowser on January 11, 2010 04:20 PM
Guest Contribution: Monetary Policy and Asset Bubbles in 2010
By Joseph E. Gagnon
Today, we're fortunate to have Joe Gagnon, senior fellow at the Peterson Institute for International Economics, as a guest contributor.
In his speech at the American Economic Association yesterday, Ben Bernanke said that monetary policy played at most a small role in the U.S. housing bubble and that financial regulatory policy is the appropriate tool for preventing harmful asset price bubbles in the future. I agree with these conclusions, but I suspect that many do not, even within the world of central banking.
Posted in Econbrowser on January 4, 2010 11:38 AM
Some International Finance at ASSA
I'm not at the ASSA meetings in Atlanta this year, but my coauthor Hiro Ito is presenting our papers (with Joshua Aizenman) in two very interesting sessions on international finance.
Posted in Econbrowser on January 4, 2010 07:47 AM
The Prospects for Global Imbalances: A View from the IMF
Following up on recent posts ([1], [2], [3], [4], [5] [6]) Here's another take on the prospects for resolving global imbalances, from Olivier Blanchard and Gian Maria Milesi Ferretti, "Global Imbalances: In Midstream?" Staff Position Note 09/29 (Dec. 22, 2009):
IV.B. Lower Global Imbalances in the Future
What will happen in the future depends on how long the factors we just listed will be in play [oil price decline, asset price busts, increase in home bias, the hit to durable consumption and investment goods demand].
Below is reproduced the IMF World Economic Outlook's October 2009 forecast for current account balances.
Posted in Econbrowser on December 27, 2009 07:30 PM
What went wrong and how can we fix it?
That's the title of an article I wrote for the UCSD Economics Department's Economics in Action, which I reproduce below.
Posted in Econbrowser on December 19, 2009 04:49 PM
Teaching Macro, after the Great Recession
Or, How to adapt the intermediate macro syllabus to an altered world
This semester is the first time I've taught intermediate macroeconomics link in over two years. The last time I taught this course in the Spring of 2007, the key topics were inflation, the possibility of stagflation, and the possibility of containing the ongoing housing slowdown.
Posted in Econbrowser on December 17, 2009 12:44 AM
From VoxEU: The Great Trade Collapse
Causes, Consequences and Prospects, edited by Richard Baldwin
From Baldwin's introductory chapter:
World trade experienced a sudden, severe and synchronised collapse in late 2008 -- the sharpest in recorded history and deepest since WWII. This Ebook -- written for the world's trade ministers gathering for the WTO's Trade Ministerial in Geneva -- presents the economics profession's received wisdom on the collapse....
Posted in Econbrowser on November 29, 2009 02:52 PM
Blogonomics: Some Random Thoughts
Back in late October, I was invited to a Bank of Canada workshop (organized by Brigitte Desroches and James Rossiter), entitled "Understanding economic outcomes in uncertain times". I was flattered (and a little surprised) to be asked to participate in a panel discussion on "blogonomics", chaired by David Wolf of the Bank of Canada. On the panel were esteemed fellow bloggers David Altig of Macroblog and Stephen Gordon of Worthwhile Canadian Initiative.
Posted in Econbrowser on November 26, 2009 08:49 AM
Yes the future deficits are worrisome
Paul Krugman ([1], [2], [3]) has been arguing vigorously that U.S. budget deficits are no cause for concern. I see things differently.
Posted in Econbrowser on November 25, 2009 06:58 AM
Will rising oil prices derail the recovery?
Last April I described new research on the role of oil prices in the recent recession. Here's an update on what's happened since then.
Posted in Econbrowser on November 10, 2009 07:43 PM
Consequences of the Lehman failure
William Sterling of Trilogy Global Advisors has an interesting new paper on the abrupt changes in financial markets subsequent to Lehman's bankruptcy on September 15, 2008.
Posted in Econbrowser on November 7, 2009 05:46 PM
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:
Posted in Econbrowser on October 28, 2009 08:21 PM
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.
Posted in Econbrowser on October 27, 2009 07:03 PM
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.
Posted in Econbrowser on October 25, 2009 06:03 AM
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.
Posted in Econbrowser on October 22, 2009 03:29 PM
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.
Posted in Econbrowser on October 21, 2009 08:35 PM
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.
Posted in Econbrowser on October 14, 2009 08:56 AM
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:
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. ...
Posted in Econbrowser on October 12, 2009 09:30 PM
The Dollar in Doubt?
I've found it puzzling that there's all this talk about the prospects for the dollar, in the wake of the G-20 meetings, and more recently World Bank President Zoellick's comments about the primacy of the dollar as a reserve currency. My puzzlement arises from the fact that many of the concerns now being voiced have been voiced before.
Posted in Econbrowser on September 30, 2009 09:25 PM
Federal Reserve reverse repurchases
Here I offer some thoughts on Bloomberg's account that the Fed has made inquiries with its dealers about the feasibility of a significant increase in the Fed's reverse repo operations.
Posted in Econbrowser on September 27, 2009 06:30 AM
The G-20 and Rebalancing
According to news accounts [0], rebalancing is going to be a central topic. Brad Setser, now in his official capacity as NEC/NSC director of international economics, blogs:
We will press the G-20 to agree on a framework for strong, balanced and sustainable growth. As the U.S. starts to act more responsibility, it will borrow less and spend a bit less on the rest of the world's goods. That means borrowing by U.S. households cannot be the main source of global demand growth in the future.
Posted in Econbrowser on September 23, 2009 09:32 PM
We Should'a Run Smaller Deficits
From today's chapters 3 and 4 of the IMF World Economic Outlook, released today. From Chapter 4:
"...the results based on the small-scale regressions suggest that economies with larger current account deficits, rising inflation, and a deteriorating fiscal balance before a crisis experienced significantly larger output losses [from financial crises].
Posted in Econbrowser on September 22, 2009 08:12 PM
IMF Global Financial Stability Report on Financial Sector Interventions
Chapters 2 and 3 of the IMF's Global Financial Stability Report are out.
Posted in Econbrowser on September 21, 2009 10:00 AM
Current Account Imbalances, and Global Liquidity
These topics are the subject of two special issues, the first in IMF Staff Papers, and the second in the Review of International Economics....
Posted in Econbrowser on September 19, 2009 06:33 PM
Credit Stock Growth versus New Credit
Deleveraging implies slow growth in total credit, and according to the usual reasoning, slow growth in GDP. Several of Deutsche Bank's economists, however, focus on what they call the credit impulse. They provide the following provocative graph, which suggests a rapid recovery:
Posted in Econbrowser on September 17, 2009 06:43 AM
Guest Contribution: Reforming Banking by Reforming Housing
By Simon van Norden
Today, we're fortunate to have Simon van Norden, Professor of Finance at HEC Montréal (École des Hautes Études Commerciales), continue as a guest contributor.
In my previous post, I wrote about some of the evidence linking serious banking crises to real estate market collapses. That evidence is far from iron clad; it is simply the observation that many banking crises in mature economies have their origins in a real estate boom and bust cycle. However, the idea is also intuitively appealing.
Posted in Econbrowser on September 14, 2009 09:00 PM
Guest Blog: Financial Crisis and Reform Déjà Vu
By Simon van Norden
Today, we're fortunate to have Simon van Norden, Professor of Finance at HEC Montréal (École des Hautes Études Commerciales), as a guest blogger.
"Once you've seen one financial market crisis...you've seen one financial market crisis."
-- Attributed to Federal Reserve Board Governor Kevin Warsh by former US Treasury Assistant Secretary for Economic Policy Phillip Swagel in The Financial Crisis: an Inside View, March 2009, p. 4.
Posted in Econbrowser on September 7, 2009 05:01 PM
Of Ideologues and Ranters
From Arnold Kling's entry yesterday:
Kwak goes on to endorse Chinn's ideological rant that the Bush tax cuts caused the financial crisis. Yes, I know that Chinn is speaking in the tone of economic analysis rather than a rant, but only a left-wing ideologue would take the thesis seriously. I bet Kwak cannot find a blog post of Chinn's where he made a policy point against Democrats/liberals or for Republicans/conservatives.
Posted in Econbrowser on August 29, 2009 01:26 AM
Reflections on the Causes and Consequences of the Debt Crisis of 2008
From "Reflections on the Causes and Consequences of the Debt Crisis of 2008," in the La Follette Policy Report by Menzie Chinn and Jeffry Frieden:
In late 2008, the world's financial system seized up. Billions of dollars worth of financial assets were frozen in place, the value of securities uncertain, and hence the solvency of seemingly rock solid financial institutions in question. By the end of the year, growth rates in the industrial world had gone negative, and even developing country growth had declined sharply.
Posted in Econbrowser on August 26, 2009 09:17 PM
Leading Indicators: Key Economies and the BRICs
A month ago, I examined the information content of the OECD's Composite Leading Indicators. The August release (for June data) is out. There's substantial variation in the implied outlook across economies.
Posted in Econbrowser on August 16, 2009 03:47 PM
Exchange Rates: New Papers
During the summer, I had the good fortune to attend two excellent conferences focused on new findings in exchange rate economics (yes, not all economic research is focused on the financial crisis and recession). The first was a Bank of Canada-European Central Bank conference Exchange rates: The global perspective, and the second was the NBER International Finance and Macroeconomics Summer Institute session "Exchange Rates and Relative Prices".
Posted in Econbrowser on August 10, 2009 07:20 PM
China's Impact on the Global Economy: A Symposium
As attested to by the large amount of coverage of the recent US-China Strategic and Economic Dialog [0] [1], [2], [3], [4],[5] China looms large in any discussion of the world economy. One of the most important contributors to the informed discussion on this subject was Brad Setser, at the Council on Foreign Affairs and before that at RGE Monitor. Unfortunately, Dr. Setser will be leaving the blogosphere, so his insights will be missed (although fortunately for us, he'll be adding his input at the NEC, where we all wish him well).
So now, there'll be even a greater need for reasoned analysis. One addition to the discussion is a Symposium on China's impact on the global economy just published in Pacific Economic Review (August 2009). From my introductory chapter to the symposium:
Over the past decade, China's presence in the global economy has grown increasingly large. Along many dimensions, China is, rightly or wrongly, perceived to have an enormous impact. In the trade arena, China is now widely considered to be the world's workshop, displacing some traditional exporters of labour-intensive goods, even as its economy is ever more closely woven into the fabric of the increasingly fragmented chain of production....
Posted in Econbrowser on August 5, 2009 09:00 PM
Fiscal Policy and Banking Sector Repair Synergies
From the conclusion to "How Effective is Fiscal Policy Response in Systemic Banking Crises?", by E. Baldacci, S. Gupta, and C. Mulas-Granados:
This paper assessed the effects of fiscal policy responses during 118 episodes of systemic banking crises in advanced and emerging market economies. The results indicate that timely countercyclical fiscal responses (both due to discretionary measures and automatic stabilizers), accompanied by actions to deal with financial sector weaknesses, contribute to shortening the length of crisis episodes. During crisis caused by financial sector distress, fiscal expansions increase the likelihood of earlier exit from a shock episode. Expansionary fiscal policies reduced the crisis duration by almost one year. These results hold for different definitions of crisis duration and alternative specification and estimation methods. The findings are consistent with recent studies that highlight the importance of countercyclical policy in response to recessions associated with financial sector problems (Classens, Kose, and Terrones, 2008; IMF, 2009b; IMF, 2009c).
Posted in Econbrowser on July 29, 2009 07:50 PM
Three Pictures: China's Exchange Rate and Trade Balances
There's plenty of commentary on the ongoing China-US Strategic Economic Dialog, from the Economist [1], Reuters [2], [3], and Bloomberg [4] [5]. Here are three pictures to place some of the issues in perspective.
My first observation is while the nominal USD/CNY had stabilized in recent months, the exchange rate that matters most for global imbalances, the Chinese real trade weighted CNY, has moved around a bit, as the dollar has appreciated and depreciated.
Posted in Econbrowser on July 27, 2009 12:37 PM
Output Gap Measurement and Prospects in the Wake of the Crisis
Different concepts of potential GDP
For serious macroeconomists, the magnitude (or existence) of the output gap is a central factor for determining the appropriate policy actions (see for instance Weidner and Williams). In several recent posts, I've discussed the variety of approaches to estimating the output gap [0] [1]. A recent symposium on Projecting Potential Growth published by the Federal Reserve Bank of St. Louis is an excellent resource for anybody who wants to think seriously and carefully about the challenges in estimating this variable. In the lead article entitled "What Do We Know (And Not Know) About Potential Output?", the authors Susanto Basu and John Fernald write:
Posted in Econbrowser on July 22, 2009 08:33 PM
Links for 2009-07-17
Some quick remarks about the evidence for economic recovery, central bank independence, and Goldman Sachs.
Posted in Econbrowser on July 17, 2009 01:33 PM
Concerns about the Fed's New Balance Sheet
That's the title of a chapter I contributed to a new book edited by John Ciorciari and John Taylor entitled The Road Ahead for the Fed. The book grew out of a conference held at Stanford University in March.
Posted in Econbrowser on July 14, 2009 09:08 PM
Global Financial Stress
Several months ago, I discussed the indicators of financial stress developed by the IMF in two posts [1] [2]. The working paper documenting and extending the results in the World Economic Outlook has just been released.
Posted in Econbrowser on July 8, 2009 07:25 PM
New Papers on International Finance: Crises, Puzzles, and Exchange Rates
Summertime is conference season, especially for those of us who don't live close to a major airport hub. The first conference I attended was the NBER's International Seminar on Macroeconomics, co-organized by Lucrezia Reichlin and Ken West. The conference was broken up into several sections: Financial Crises, International Economic Puzzles, Exchange Rates and Financial Development. Lot's of interesting papers, and plenty of stimulating discussion. I can't do justice to the proceedings, but I can provide the summaries of the papers.
Posted in Econbrowser on June 29, 2009 09:40 PM
On grilling the Fed Chair
I got a bit angry at accounts of the latest appearance of Federal Reserve Chair Ben Bernanke before the U.S. Congress.
Posted in Econbrowser on June 27, 2009 07:26 AM
Links for 2009-06-26
The Federal Reserve Bank of New York has put together some very useful timelines of the financial crisis, if you want a handy reference for what happened when in both the United States and around the world.
The BEA reported that disposable personal income increased 1.6% between April and May. In the absence of the stimulus cuts to personal taxes and increases in social benefit payments, the number would have been 0.2%. Real personal consumption expenditures were up 0.2% for the month, though that leaves the April-May average 0.1% below the January-March average. Calculated Risk, always your go-to source for these matters, sums it up this way:
Usually PCE and Residential Investment (RI) lead the economy out of recession, and right now both remain weak. As households increase their savings rate to repair their balance sheets, it seems unlikely that PCE will increase significantly any time soon.
And via Craig Newmark, earn $11 a day by working in hell.
Posted in Econbrowser on June 26, 2009 08:43 AM
The Global Saving Glut: Rest in Peace? Mirage? Bete noir?
I've just come back from two weeks on the road, during which time I attended a couple of conferences. The first conference (NBER International Seminar on Macroeconomics) dealt with issues of exchange rates, reserve accumulation and financial crises (more on that later). The second one, a joint Bank of Canada-ECB workshop (not online), focused on exchange rates in the global economy. At the latter, Jeff Frankel delivered the keynote speech, entitled "On Global Currency Issues", in which he outlined what's "out" and what's "in" in international finance (Powerpoint presentation here). One of the phenomena he concluded was no longer relevant was "the global saving glut".
Posted in Econbrowser on June 22, 2009 01:51 PM
Guest Blog: The Impact of the Trilemma Configurations on Macroeconomic Performance
By Hiro Ito
Today, we're fortunate to have Hiro Ito, Associate Professor of Economics at Portland State University as a guest blogger.
In my last posting, I introduced a recent paper coauthored with Menzie Chinn and Joshua Aizenman (UC, Santa Cruz) on the "trilemma," or "impossible trinity" -- a country simultaneously may choose any two, but not all, of the three goals, monetary independence, exchange rate stability and financial integration.
Posted in Econbrowser on June 17, 2009 05:40 AM
The Dollar as a Reserve Currency: Apres le Deluge
Time to review trends in reserves, against the backdrop of financial crisis, recession, and dollar gyrations. (I'll try to be original, but Brad Setser has been more diligent than I in covering these issues over the past few months. [0] [1] [2])
A few observations:
- Known dollar reserves as a share of world reserves appear to be falling.
- Total dollar reserves have likely not declined as precipitously.
- Even with the decline in the dollar share, it is probably not as low as it was during the early 1990's.
- The dollar share is (mechanically) linked to the dollar's value.
- Known dollar reserves at end-2008 are less than predicted by a historical correlation.
- But this differential is infinitesimal compared to the "unallocated" share of total reserves.
Posted in Econbrowser on June 15, 2009 04:20 PM
Relevant and Irrelevant Criticisms of the Stimulus Package
Keith Hennessey critiques the stimulus package. Some points make sense, some points, well, I wonder. For instance, Hennessey argues the stimulus is not timely. As I've noted before, it's not timely only if you think this will be a relatively short recession, characterized by a rapidly dissipating negative output gap. [0] [1] [2].
Posted in Econbrowser on June 5, 2009 02:12 PM
Guest Blog: Japan's first trade deficit in 28 years
By Eiji Fujii
Today, we're fortunate to have Eiji Fujii, Professor of Economics at Tsukuba University as a guest blogger.
Shaken by the world financial crisis, Japan has recorded the first trade deficit (on the April-March fiscal year basis) in 28 years (see Figure 1). The trade balance of the 2008 Japanese fiscal year was about -725 billion yen. The last trade deficit (on the fiscal year basis) was recorded in 1980 when the second oil crisis hit the economy hard.
Posted in Econbrowser on May 30, 2009 11:05 AM
More Thoughts on Potential GDP and the Output Gap
In several past posts, I've been taken to task for using the CBO measure of the output gap (and the associated measure of potential GDP) [0] [1]. Some criticize the false sense of certainty that is provided by the official measures, since they are known to be revised as data comes in. Some criticize the measures on the basis the fact that the statistical methodologies (Hodrick-Prescott, Band-Pass) are divorced from a formal economic model. Some criticize the concept of potential GDP derived from a production function approach (i.e., thinking about the economy as one big production function associated with one big firm...). Arnold Kling's recent critique centers upon the idea that output is not homogenous, and we need different types of capital (and by extension labor) when the desired composition of output changes. Yet another -- not entirely unrelated -- perspective argues that when relative prices change a lot, potential GDP can drop due to technological frictions; Jim provides a cogent discussion of this approach.
Posted in Econbrowser on May 28, 2009 11:25 AM
More papers on the credit crunch
Links to some interesting papers that I recently read.
Posted in Econbrowser on May 27, 2009 06:01 AM
The Emerging Global Financial Architecture
Events, particularly these days, tend to outrun the best laid plans to anticipate research trends. And it might seem that this was true in the case of this conference, sponsored by UCSC's Santa Cruz Center for International Economics, the Journal of International Money and Finance, and the Federal Reserve Bank of San Francisco. The conference was planned last year, at a time when most academic researchers were aware and concerned about the incipient economic slowdown, and whether the major economies would "de-couple", and in turn how these factors would impact the constellation of global imbalances.
Posted in Econbrowser on May 6, 2009 07:45 AM
Some Reflections on CEA Chair Christina Romer's JEC Testimony
This is a slightly revised version of a piece that appeared on the Washington Post's The Hearing today.
In her testimony before the Joint Economic Committee today, Dr. Romer, Chair of the CEA, presented an explication of the progress of the financial crisis and the economic downturn, the anticipated effects of the measures undertaken and planned, and the outlook going forward. On most points, we're in agreement, so I'll only highlight some key issues of interest.
Posted in Econbrowser on May 1, 2009 07:50 AM
Two Books
...and the Financial and Economic Crisis
I don't read very many books. At least not during the academic year. But I have read two books recently that are quite germane to thinking about the buildup to the financial crisis, and thinking about how to respond to the current economic downturn. The first is Akerlof and Shiller's Animal Spirits. The second one is actually not yet out -- it's Justin Fox's The Myth of the Rational Market (I got a prepublication copy; here's a hint of it). They are both important books, well worth reading.
Posted in Econbrowser on April 24, 2009 09:10 PM
Growth Forecasts for 2009-2010 from the IMF
The IMF's World Economic Outlook (Chapter 1), released this morning, is grim:
Posted in Econbrowser on April 22, 2009 06:21 AM
Macroeconomic Schisms
There has been a lot of breast-beating in the press and in the blogosphere about how economists failed to discern the possibility that not all was going well in the years leading up the current financial and economic crisis [1]. I think the notion that all economists were blithely optimistic has been dispelled (well, okay, here's a couple of exceptions: Dan Gross h/t Free Exchange, A. Kaletsky). At the risk of some gross simplifications, I will speculate that there was -- until recently -- less optimism among academic macroeconomists than Wall Street economists. There was probably less anxiety among say finance professors who focused on asset pricing (as opposed those who worked in banking) than macroeconomists (Dani Rodrik highlights the diversity). One divide that I think is not particularly relevant in locating the source of the crisis is the most well known one -- specifically whether prices are sticky.
In my opinion, the big divide in thinking relates to how economists conceive of financial markets working. This is a divide that cuts across other divides. For instance, the Hicksian decomposition (IS-LM), in its simplest incarnation, treats the financial world as one wherein bonds are identical, and the only means of borrowing; there is no separate channel for lending, say via bank loans, to influence aggregate demand (see this post for the many channels of monetary policy). In the real business cycle literature, and many New Keynesian DSGE models, there is a representative bond (and lending rate) which summarizes the asset markets (see Camilo Tovar's survey of DSGEs for a discussion).
Posted in Econbrowser on April 16, 2009 09:00 AM
Guest Blog: The Enduring Trilemma
By Hiro Ito
Today, we're fortunate to have Hiro Ito, Associate Professor of Economics at Portland State University as a guest blogger.
While the current global crisis does not show any sign of bottoming out, policy makers around the globe are reevaluating international macroeconomic policies and discussing the post-crisis future of the international financial architecture -- as we saw in the recent G20 meeting.
Posted in Econbrowser on April 8, 2009 06:47 PM
Phillip Swagel on the Financial Crisis
I'm behind the curve on recommending Phillip Swagel's BPEA paper on the Administration's response to the financial crisis. But today he talked to the students in my macro course, and his presentation just reinforced my view that his account is one that everbody should read.
Posted in Econbrowser on April 8, 2009 06:30 PM
Stress
As the G-20 leaders meet in London, one graph should remind the representatives of these disparate countries of their shared interest in restoring the health of the financial systems of the developed countries.
Posted in Econbrowser on March 31, 2009 09:24 PM
Guest Post: President Obama's Plan to Improve Small Business Credit
By Robert Fairlie
Today, we're fortunate to have Rob Fairlie, UC Santa Cruz Professor of Economics as a guest blogger. Some of his work was discussed in this earlier post.
Posted in Econbrowser on March 20, 2009 11:50 AM
Moral hazard and AIG
We are now suffering the consequences of one of the most spectacular financial miscalculations in history, after investors around the world discovered that trillions of dollars invested in securities derived from U.S. home mortgages were far riskier than they had originally believed.
Posted in Econbrowser on March 10, 2009 10:36 PM
Not Nonsense (House Prices)
Remember this graph?
Posted in Econbrowser on February 25, 2009 09:20 PM
Prospects for the U.S. banking system
Some thoughts on the extent of the problem and options for solution.
Posted in Econbrowser on February 17, 2009 08:52 PM
The paradox of thrift
Or, how come you used to say that if consumers don't save more, it will wreck the economy, and now you say, if consumers do save more, it will wreck the economy?
Posted in Econbrowser on February 8, 2009 08:06 AM
A New Meme: Blame It on Beijing (and Seoul, and Riyadh...)
Perhaps I'm overstating it, but I think this is the abridged version of the Bush Administration's perspective on how we got into the financial mess we find ourselves in. You might ask why I focus on the ideas of the outgoing government. Well, it's because I'm confident that this will be a thesis pushed by some commentators eager to absolve previous policymakers of blame [1]. And indeed (as Mish points out), this view has apparently adherents in high places.
Posted in Econbrowser on January 21, 2009 05:43 PM
I Hope They're Right: The Forecast in the 2009 ERP
The Bush Administration's last Economic Report of the President [large pdf] (Link updated 1/21/09 12:35pm Pacific) was released on Friday. From Chapter 1:
The Administration's forecast calls for real GDP to continue to fall in the first half of 2009, with the major declines projected to be concentrated in the fourth quarter of 2008 and the first quarter of 2009. An active monetary policy and Treasury's injection of assets into financial institutions are expected to ease financial stress and to lead to a rebound in the interest-sensitive sectors of the economy in the second half of 2009.
Posted in Econbrowser on January 20, 2009 07:08 AM
Executive compensation
Is there a problem? And is there a solution? My answers: yes, and yes.
Posted in Econbrowser on January 19, 2009 03:19 PM
The Startling Dropoff in Trade Flows
The trade release has already been remarked upon, in terms of the dropoff in both exports and imports signaling a synchronized recession. [1], [2], [3], [4] I have little to add here, except for plotting the "cliff-diving" in log real terms.
Posted in Econbrowser on January 14, 2009 05:26 PM
International Imbalances: Measurement and Implications
Paul Kedrosky has observed that a statistical analysis (word cloud) of the American Economic Association session titles, or even of the papers, leads to the impression that the economics profession has been relatively uninterested in the ongoing financial and economic crisis. Unfortunately, this observation misses ignores the fact that session proposals are submitted a full eleven months ahead of the ASSA meetings. Think back to January 2008, and the terms ascribed to those who warned of a severe slowdown ("alarmist", etc.), and the whole discussion is cast in a different light.
Posted in Econbrowser on January 12, 2009 03:10 PM
Aggregate Demand and Finance and the Collapse in Trade
From "Trade-Finance Pinch Hurts the Healthy," WSJ, 12/22/08:
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.
Posted in Econbrowser on December 29, 2008 09:51 AM
"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 [0] (see also [1]). 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.
Posted in Econbrowser on December 25, 2008 07:50 PM
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):
Posted in Econbrowser on December 18, 2008 12:20 PM
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."
Posted in Econbrowser on December 14, 2008 06:54 AM
William Kristol on Economic Theory and Practice
I don't usually read Bill Kristol's column, but once in a while, my eyes get caught by a headline (that's the difference between reading online and "on paper"), and I'll check out what he has to say. The other day, I read his column "Admit we don't know" on the current economic crisis that, while not in my mind "wrong", seemed puzzling to me. Pay attention to the last paragraph (highlighted in bold).
Posted in Econbrowser on November 28, 2008 05:44 PM
Obama's economic plans
President-elect Barack Obama today announced more details of the economic team that will be advising the new president. I find these quite encouraging.
Posted in Econbrowser on November 24, 2008 04:22 PM
GDP Prospects: Mean Estimates Fall and Dispersion Increases
One of the points that all the panelists at last Thursday's event sponsored by WAGE ("The Global Economic Crisis") agreed on was how quickly the macroeconomic situation has deteriorated. I wanted to see if one could quantify the rapidity with which growth prospects have changed. Here is one perspective, showing the mean forecast from the October and November WSJ surveys of forecasters.
Posted in Econbrowser on November 23, 2008 01:40 PM
The Global Economic Crisis: Propagation to the Rest of the World
Last Thursday, I had the opportunity to participate in a panel on Global Economic Crisis: The Untold Stories, sponsored by the Center for World Affairs and the Global Economy (WAGE). I was tasked with surveying the impact on the economy outside the borders of the United States -- in 20 minutes.
Posted in Econbrowser on November 22, 2008 08:22 AM
The Progress of the Financial Crisis in One Picture: Mortgages, Flight to Safety, Credit Lock
Markus Brunnermeier provides an excellent summary graph of the financial crisis, told in "spreads".
Posted in Econbrowser on November 19, 2008 08:32 PM
China Acts
From Bloomberg:
China Announces 4 Trillion Yuan Economic Stimulus (Update2)
By Li Yanping and Chia-Peck Wong
Nov. 9 (Bloomberg) -- China announced a 4 trillion yuan ($586 billion) stimulus plan to spur expansion in the world's fourth-largest economy, helping sustain global growth as the U.S., Europe and Japan teeter on the brink of recession.
The funds, equivalent to almost a fifth of China's $3.3 trillion gross domestic product last year, will be used by the end of 2010, the Beijing-based State Council said today on its Web site. China will adopt a "pro-active fiscal policy" and pursue a "moderately loose" monetary policy, it said.
Posted in Econbrowser on November 9, 2008 12:24 PM
Main Street Recession Watch: ADP Report on Employment
Further evidence that the small business segment of the economy is undergoing stress. From the ADP National Employment Report:
[Joel] Prakken added, "This month's employment loss was driven by the goods-producing sector which declined 126,000 during October, its twenty-third consecutive monthly decline. The manufacturing sector marked its twenty-sixth consecutive monthly decline, losing 85,000 jobs. These losses were compounded by an employment decline in the service-providing sector of the economy which fell by 31,000, the first loss in the serviceproviding sector recorded by the ADP Report since November of 2002."
"Large businesses, defined as those with 500 or more workers, saw employment decline 41,000, while medium-size companies with between 50 and 499 workers declined 91,000. Employment among small-size businesses, defined as those with fewer than 50 workers, declined 25,000. This is the first outright decline in small business employment reported by the ADP Report since November of 2002, and the largest percentage decline since the economy was emerging from recession in early 2002," said Prakken.
Posted in Econbrowser on November 5, 2008 09:40 PM
Pocketful of Multipliers (II): Options for Stimulus Packages
As the debate over the nature and size of a stimulus package wends its way through the Congress [0], [1], [2], I thought it would be useful to bring numbers into the debate, especially as we are considering fiscal stimulus in a time when the Bush Administration has constrained, by dint of previous profligacy, our options. In particular, I want to return to the issue of multipliers, discussed in nearly a year ago. Here, I want to provide a little more specificity, regarding the impact depending upon the type of outlays.
Posted in Econbrowser on October 27, 2008 09:54 PM
Yikes! Euro Area Edition
From the FT today:
Survey underlines grim outlook for eurozone
By Ralph Atkins in Frankfurt, Published: October 24 2008 11:23 | Last updated: October 24 2008 18:37
The eurozone economy contracted sharply in October as the global bank crisis slammed the brakes on business activity and blackened the outlook for the 15-country region, a closely watched survey indicated on Friday.
Posted in Econbrowser on October 25, 2008 08:18 AM
Middle Kingdom Malaise? The Latest Chinese GDP Figures
Monday's announcement that Chinese growth was decelerating was not surprising; that it decelerated to below the consensus of 9.7% growth to 9% (y/y) in 2008Q3 was a surprise. This was reflected in the headlines: "China growth rate slows sharply" (FT), "China less likely to buffer world crisis as its economy slows" (LA Times), "China's economy feels chill from global crisis" (AP). For detailed numbers, see Haver.
Posted in Econbrowser on October 23, 2008 02:17 PM
CRA and Fannie and Freddie as betes noire
There is so much chaff floating around about the roles of Fannie and Freddie and of the Community Reinvestment Act in the current crisis, despite the best efforts of economists like Jim Hamilton [0] [1], Mark Thoma and Janet Yellen, that it seems worthwhile to once again go through some of the arguments that have been forwarded.
From David Goldstein and Kevin G. Hall, "Private sector loans, not Fannie or Freddie, triggered crisis":
Federal Reserve Board data show that:
- More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.
- Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.
- Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.
Posted in Econbrowser on October 21, 2008 12:00 PM
Rapid Downward Revisions in Expected Growth
...or: "Yikes!"
There have been plenty of accounts that have noted the growing anxiety over economic growth over the short to medium term. However, this forecast from Deutsche Bank, released last night, is quite sobering, especially when compared to forecasts released just two weeks ago.
Posted in Econbrowser on October 18, 2008 10:27 AM
Credit Spreads and How Lax Is Monetary Policy?
All eyes have been on the housing market as the trigger for the financial crisis, but we're all aware that there are other potential "triggers" for additional distress: auto loans and credit cards. In addition, spreads are not everything -- levels of real interest rates matter as well.
Posted in Econbrowser on October 15, 2008 11:12 PM
The McCain and Obama Economic Advisers Debate
...at the UW-Madison. Ike Brannon spoke on behalf of the McCain-Palin campaign and Austan Goolsbee on behalf of the Obama-Biden campaign. Here's the link to Proposals for Change (Adobe Flash required).
Posted in Econbrowser on October 10, 2008 11:04 AM
The IMF's Outlook
From Chapter 1 of the IMF World Economic Outlook, released today:
The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s. Against an exceptionally uncertain background, global growth projections for 2009 have been marked down to 3 percent, the slowest pace since 2002, and the outlook is subject to considerable downside risks. The major advanced economies are already in or close to recession, and, although a recovery is projected to take hold progressively in 2009, the pickup is likely to be unusually gradual, held back by continued financial market deleveraging. In this context, elevated rates of headline inflation should recede quickly, provided oil prices stay at or below current levels. The emerging and developing economies are also slowing, in many cases to rates well below trend, although some still face significant inflation pressure even with more stable commodity prices. The immediate policy challenge is to stabilize global financial markets, while nursing economies through a global downturn and keeping inflation under control. Over a longer horizon, policymakers will be looking to rebuild firm underpinnings for financial intermediation and will be considering how to reduce procyclical tendencies in the global economy and strengthen supplydemand responses in commodity markets.
Posted in Econbrowser on October 8, 2008 09:32 AM
How Bad Will the Downturn Be? Stylized Facts
The IMF released several chapters of the World Economic Outlook; one chapter entitled Financial Stress and Economic Downturns provides some insights into the ramifications of the current financial turmoil.
Posted in Econbrowser on October 6, 2008 10:52 PM
Roundtable discussion on the financial crisis
I participated on Friday with several other UCSD faculty members (including Nobel laureate Harry Markowitz) in a discussion about the current economic crisis. If you have RealPlayer, you can view the discussion here, though I recommend fast-forwarding to skip the first 8 introductory minutes to get to the actual discussion.
Posted in Econbrowser on October 6, 2008 03:19 PM
Understanding the TED spread
One measure that is being used to summarize the strain in financial markets is the TED spread. This is calculated as the gap between 3-month LIBOR (an average of interest rates offered in the London interbank market for 3-month dollar-denominated loans) and the 3-month Treasury bill rate. The size of this gap presumably reflects some sort of risk or liquidity premium. I was interested to break the TED spread down into identifiable components to try to get a better understanding of what may be responsible for its recent behavior.
Posted in Econbrowser on September 28, 2008 09:09 PM
Last Quarter's Fundamentals...
Weren't as strong as some of us thought.
I was surprised; so were market observers. From Bloomberg:
U.S. Economic Growth Slower Than Initially Estimated (Update2)
By Timothy R. Homan
Sept. 26 (Bloomberg) -- The U.S. economy expanded more slowly than previously estimated in the second quarter, showing consumer spending was weakening before the credit crisis intensified.
Posted in Econbrowser on September 26, 2008 08:05 PM
The Financial Crisis and Entrepreneurship
Most of the discussion surrounding the current crisis has focused on the implications for major businesses and their hiring and investment decisions, or households and their employment possibilities, or consumer behavior. One overlooked (or underemphasized) aspect of the issue is the impact on small firms. Fortunately, my former colleague (and coauthor), Rob Fairlie has just published a book that can inform one's thinking on this subject.
Posted in Econbrowser on September 24, 2008 09:13 PM
Who'll Be the Next Treasury Secretary?
As the Congress was debating how much power and how many hundreds of billions to the US Treasury, I was pondering who would be in charge of all that come January 20th.
Posted in Econbrowser on September 23, 2008 10:55 PM
What happened to oil markets on Monday?
Here's how it was reported, for example, in the Wall Street Journal:
Reaction to the Wall Street bailout and frenzied last-minute trading in the oil market sent crude prices soaring by more than $16 a barrel, the biggest one-day jump ever.
The late-day spike, which shoved oil up 16% to $120.92 a barrel on the New York Mercantile Exchange, offered an illustration of Wall Street's hard-to-predict moves amid broad market turmoil.
And here's what really happened.
Posted in Econbrowser on September 23, 2008 10:04 AM
Brad DeLong on Bernanke and Paulson
Brad DeLong had some insightful and amusing observations on the priorities of Federal Reserve Chair Ben Bernanke and Treasury Secretary Henry Paulson. I can't resist reproducing Brad's comments with some annotations of my own.
Posted in Econbrowser on September 22, 2008 11:51 AM
Paulson bailout
Let me begin with the point on which I am in complete agreement with Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke-- it is hard to overstate just how scary this week's developments in financial markets could be.
Posted in Econbrowser on September 21, 2008 02:17 PM
The housing meltdown: Why did it happen in the US?
From a timely BIS working paper by Lucy Ellis released on Thursday:
Mortgage lending standards eased in many countries in recent years, but the limited available cross-country evidence does suggest that the process went further in the United States. Standards are difficult to measure because different aspects need not all move together (Gorton 2008), but the observed increase in early payment defaults in the United States (but not elsewhere) provides direct evidence that it occurred (Kiff and Mills 2007); Gerardi, Lehnert, Sherlund and Willen (2008) provide additional detail on the easing in lending standards.
Two developments seem to have spurred the easing in US standards. First, a range of legislative and policy changes had been made to encourage the development of a non-conforming (Alt-A and subprime) lending sector, lying outside the model defined by the government-sponsored enterprises (GSEs, Fannie Mae and Freddie Mac). Part of the motivation for this was a desire to ensure that home ownership was accessible to households who had historically been underserved by mortgage lenders (Gramlich 2007). In addition, the administration had wanted to reduce the GSEs' domination of the mortgage market. Following problems with accounting and governance at both institutions, the GSEs' capacity to expand lending was capped by new regulatory limits on their activities (Kiff and Mills 2007, Blundell-Wignall and Atkinson 2008). [emphasis added -- mdc]
Posted in Econbrowser on September 20, 2008 10:40 PM
Some Observations on the Ongoing Crisis: Causes and Opportunity Cost Again
There's a lot of commentary -- more comprehensive and up to date than I can provide -- on the crisis and the attempts to resolve the logjam in the financial markets.[0], {1] But I stilll have a couple of thoughts about the causes, and the implications, of the process that has resulted in so much turmoil this week.
Posted in Econbrowser on September 19, 2008 07:15 PM
Back to the Real Side of the Economy: Recession Watch
Only on a day like today does an over 1 percent decrease in industrial output move to third page. But this item (and this hilarious article) reminded me to update the indicators used by the NBER BCDC are headed. Their trajectories are, in general, not too comforting.
Posted in Econbrowser on September 15, 2008 07:44 PM
Palin, on the Ongoing Financial Crisis
In response to the largest de facto nationalization in US history, we have this example of Governor Palin's comprehension of this issue (ABC News):
Saturday in Colorado Springs, Colo., Alaska Gov. Sarah Palin said, "The fact is that Fannie Mae and Freddie Mac have gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help."
Posted in Econbrowser on September 8, 2008 06:41 PM
Implications of adjustment to riskier dollar assets in a portfolio balance framework, illustrated in three steps
Consider a hypothetical world economy with assets denominated in dollars and euros.
Posted in Econbrowser on July 23, 2008 10:13 PM
Two Interesting Facts of the Day
As of 2008Q1, wholly 100% of the increase in the trade deficit since 2001Q4 is accounted for (in a mechanical sense) by the increase in the value of oil imports. And the dollar share of reserves appears to continue its decline.
Posted in Econbrowser on July 10, 2008 08:42 PM
Credit crunch: how we got here and how to get out
Fed Chair Ben Bernanke on Tuesday offered his perspective on the appropriate response of the Fed to the ongoing turmoil in financial markets. I still think he's overlooking a key element of what's been happening.
Posted in Econbrowser on May 13, 2008 08:16 PM
What if we'd been on the gold standard?
If the U.S. had decided to go back on the gold standard in 2006, where would we be today? That's a question my friend Randy Parker recently asked me. Here's how we both would answer.
Posted in Econbrowser on May 9, 2008 05:59 AM
Some more unwelcome developments
New bankruptcies as consumer sentiment deteriorates.
Posted in Econbrowser on April 11, 2008 12:00 PM
Distressing Table of the Day
Here's the basis for the $945 billion estimate of losses to the financial sector. From the IMF's Global Financial Stability Report:
Posted in Econbrowser on April 8, 2008 08:52 AM
Kicking the Can down the Road
Inspection of the Administration's approaches to previous policy issues provides some instructive precedents [0], [1], [2], [3], [4] to consider in light of current policy challenges in the financial markets.
Posted in Econbrowser on March 24, 2008 12:01 AM
More bad news
More confirmation that the slowdown in housing has spilled over to manufacturing.
Posted in Econbrowser on March 21, 2008 10:46 AM
Another 75
How much ammo is left in that fed funds gun?
Posted in Econbrowser on March 19, 2008 05:00 AM
TSLF
Last week the Fed announced yet another new measure to deal with the ongoing problems in credit markets in the form of a just-created Term Securities Lending Facility, which we're apparently invited to refer to affectionately as a TSLF.
Posted in Econbrowser on March 15, 2008 08:21 PM
Tabulating the Credit Crunch's Effects: One Educated Guess
In a recent paper, David Greenlaw, Jan Hatzius, Anil K Kashyap, Hyun Song Shin exposed us outsiders to the inside workings of those estimates we see of how the credit crunch affects output. The paper, entitled "Leveraged Losses: Lessons from the Mortgage Market Meltdown", was widely covered ([1], [2], [3], Calculated Risk, Big Picture) but I still think that the conclusions, as well as the methodology, bear some repeating for emphasis. And in any case, it's a long paper, and different people have focused on different aspects.
Posted in Econbrowser on March 5, 2008 08:00 PM
Crony Capitalism Comes (Returns?) to America
Or, who will be the Keating 5 of the 2000's? Perspectives from those of us who remember the East Asian crises of the 1990's.
From the NYT:
Posted in Econbrowser on February 23, 2008 10:10 PM
International Reserves: Messages from the ASSA
I did not get a chance to go to too many sessions at the ASSA meetings in New Orleans (the AEA agenda is here). That being said, I did manage to squeeze in a few on international economics, and the topic of several papers was foreign exchange reserves.
Posted in Econbrowser on January 8, 2008 08:52 AM
A Thought on the Sub-prime Debacle
Most of the NYT's recent coverage of the subprime mess focused on Greenspan and the Federal Reserve System.
Posted in Econbrowser on December 24, 2007 11:42 AM
Monetary policy using the asset side of the Fed's balance sheet
An interesting trend has developed in the Federal Reserve's asset holdings, a trend that the newly created term auction facility is designed to accelerate.
Posted in Econbrowser on December 16, 2007 12:08 PM
Term auction facility
Will a new, improved discount window solve our problems?
Posted in Econbrowser on December 12, 2007 06:05 PM
The Credit Crunch Continues, and the Conundrum Is History
The credit crunch seems to be worsening, rather than lessening, and the conundrum seems to have disappeared.
Posted in Econbrowser on November 12, 2007 09:03 PM
Superconduit
The Wall Street Journal describes it as a "superconduit", the New York Times refers to it as a "super-SIV", and the Washington Post is calling it a "Master-Liquidity Enhancement Conduit". Whatever you call it, does it make any sense?
Posted in Econbrowser on October 14, 2007 08:35 AM
Divining the Dollar
The dollar declines in response to the drop in the target Fed Funds rate. What next?
Posted in Econbrowser on September 19, 2007 09:30 PM
50 it is
For the first time in 5 years, markets were actually unsure what the Fed was going to do, with yesterday's fed funds options calling it an even chance that the Fed would settle for a 25-basis-point cut or go all the way to 50. Capital Chronicle had prepared amusing posters as to just how to interpret a 25-basis-point as opposed to a 50-basis-point cut. Fifty it was, disappointing perhaps knzn who wanted a 175-basis-point cut, but delighting economic researchers like Refet Gurkaynak and Eric Swanson who both emailed me their high spirits at finally getting another data point for what happens when the Fed surprises the markets.
Posted in Econbrowser on September 18, 2007 05:36 PM
Catch the wave
I keep trying to warn my friends in the Federal Reserve about the tsunami that's coming their way.
Posted in Econbrowser on September 15, 2007 07:27 AM
The Decoupling Scenario: Pre-Assessment
The U.S. economy appears to be slowing. Predictions of continued growth probably rely on assumptions the rest of the world continues to grow. How reasonable is this view?
Posted in Econbrowser on September 11, 2007 07:31 AM
By how much will the Fed cut rates?
Once again we're seeing a big divergence between what the markets expect the Fed to do and what the Fed expects the Fed to do.
Posted in Econbrowser on September 10, 2007 08:23 AM
Comments on Housing and the Monetary Transmission Mechanism
Here are the comments that I delivered this morning at the Fed Jackson Hole conference.
Posted in Econbrowser on September 1, 2007 12:30 PM
Worse than 1998?
From IDEAGlobal, FX Alert, August 21:
Posted in Econbrowser on August 21, 2007 09:01 PM
What does the cut in the Fed's discount rate signal?
Some analysts, and perhaps the market, seemed to view Friday's cut in the Federal Reserve discount rate as a first step in lowering interest rates generally. That view may prove to be correct, though I'm inclined to look first for an explanation in terms of the narrow tactical challenges of managing current liquidity needs.
Posted in Econbrowser on August 20, 2007 04:15 PM
Saving Glut Reversed? A Historical Analogy and Conjecture about US Adjustment
One interpretation of recent global capital flows is that the collapse in investment in East Asia post-crisis, combined with stable saving rates in ex-China developing Asia, led to an excess of saving in that region (so really the term of "investment drought" is better). Note that there was no excess saving until the collapse of unsustainable lending associated with bubbles, or crony capitalism, or -- in other models -- behavior of investors implicitly "insured" against losses. While this is a voluminous literature, it's interesting to me that few analysts have observed that a similar occurence can not be ruled out in the current unfolding drama in the ever expanding but always containable subprime mortgage crisis.
Posted in Econbrowser on August 19, 2007 05:30 PM
What is a liquidity event?
It was an exciting week in financial markets, including some dramatic central bank interventions in short-term money markets.
Posted in Econbrowser on August 10, 2007 11:14 PM
The Last Throes of PoMo Macro?
That is to say, is Post-Modernist Macroeconomic Policy over?
From Postmodernism:
Posted in Econbrowser on April 13, 2007 04:00 AM
The Subprime collapse and the housing market: a bubble or "looting"
Jim Hamilton's recent post "Bubble, bubble, toil, and trouble" elicited a tremendous amount of commentary -- and incredulity -- amongst the readers.
Posted in Econbrowser on April 2, 2007 07:40 PM
It's not such a small world after all (and it's getting bigger)
Taking a break from recession talk, I discuss some aspects of the progress of economic integration highlighted in a paper by Bergin and Glick presented at a SCCIE-JIMF conference on "Financial and Commercial Integrations"
Posted in Econbrowser on October 2, 2006 04:21 PM
Environmental totalitarianism
What do Russia and California have in common?
Posted in Econbrowser on September 24, 2006 06:26 AM
The Euro, the Dollar and Globalization
Thinking about some big global macro issues
Posted in Econbrowser on May 30, 2006 01:17 AM
Congressionally mandated shortages
Last week the U.S. House of Representatives voted by an overwhelming margin to guarantee gasoline shortages the next time we face a significant disruption in petroleum supplies.
Posted in Econbrowser on May 10, 2006 05:35 AM
Where are the financial crises?
Some other possible consequences of monetary tightening
Posted in Econbrowser on March 15, 2006 05:13 AM
Here and there around the web
Catching my eye here and there around the web this week: the source found for one of Saturn's rings and some interesting comments on Enron, Iran, and Americans serving in Iraq.
Posted in Econbrowser on December 27, 2005 01:55 PM
The gold standard and the Great Depression
How the gold standard contributed to the Great Depression.
Posted in Econbrowser on December 12, 2005 12:58 PM
Some like it hot
California may again offer the nation a useful illustration this summer of how not to deal with an energy crisis.
Posted in Econbrowser on July 1, 2005 05:51 PM
Economic consequences of the high price of oil
All but one of the U.S. recessions since World War II have been preceded by a dramatic increase in crude petroleum prices. Recent turbulence in energy markets has some analysts speculating that, in the immortal words of Yogi Berra, it could be deja vu all over again. But this oil price shock differs significantly from earlier episodes, leading me to believe that the economy will be able to adapt to the new pricing environment without a major economic slowdown.
Posted in Econbrowser on June 6, 2005 03:20 PM