“Asset Prices and Macroeconomic Outcomes: A Survey”

That’s the title of an excellent review authored by two leading experts, Stijn Claessens and Ayhan Kose, that is required reading for anyone who wants to glean the implications of asset price movements for what’s going to happen in the real economy. From the conclusion:

Challenges to theoretical and empirical findings. The links between asset prices and activity differ from the predictions of standard models in a number of ways. First, asset prices are much more volatile than fundamentals would imply and can at times deviate, or at least appear to do so, from their predicted fundamental values. The term structure of interest rates is not fully consistent with the simple expectation hypothesis. Although exchange rates can be modelled as the present value of expected fundamentals, they appear to be overly volatile,
as is the case between equity prices and their underlying dividend streams (the puzzle of “excess volatility”). Moreover, macroeconomic and financial news seem to have an exaggerated effect on asset prices: equities, bonds and currencies overreact to news about cash flows and other fundamentals.

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Where’s the Wisconsin Manufacturing Output Renaissance?

Employment in manufacturing may be estimated to be rising, but output seems to be trending sideways through 2nd quarter.


Figure 1: Log real manufacturing output in Minnesota (blue) and in Wisconsin (red), normalized to 2011Q1=0. NBER defined recession dates shaded gray. Vertical dashed line at 2013Q1 indicates beginning of Wisconsin Manufacturing and Agriculture Credit (MAC). Source: BEA, accessed 12/3/2017, NBER, and author’s calculations.

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Prepare for Massive Deficits As Far As the Eye Can See

Signs are the putative Republican “deficit hawks” are about to sign away whatever integrity they had. What are the implications for the deficit going forward, keeping in mind the fact we are near or at full employment.


Figure 1: Federal budget balance without automatic stabilizers, as a share of potential GDP (blue), and Federal budget balance as share of actual GDP (red), and baseline forecast Federal budget balance from June CBO forecast (pink), and alternative under Senate budget bill (teal), both as share of projected GDP. NBER defined recession dates shaded gray. Source: CBO, Budget and Economic Outlook: An Update (June 2017), and CBO, Cost Estimate (November 2017), NBER, and author’s calculations.
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Federal Spending Implications of the House GOP Tax Plan: $25 bn Off of Medicare …

As noted in this earlier post, the distributional consequences of the House Tax Cuts and Jobs Act should include the spending cuts. According to CBO, there will be a $25 billion cut to Medicare unless independent legislation is passed. From TPM:

…automatic cuts spring into action anytime Congress passes a bill that balloons the federal deficit, as the tax bill would. The approximately $136 billion in cuts spurred by the GOP tax bill would hit a number of government programs—including farm subsidies and the Border Patrol—but would cut most deeply into Medicare. Medicaid, Social Security, and food stamps are protected.

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