Author Archives: Menzie Chinn

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.

On Monday, President Obama announced a plan to unfreeze capital for small businesses (see here). With the potential of creating new jobs and helping the country move out of the recession, the White House offered several actions to help small businesses obtain the capital that they need. The financial crisis has taken a devastating toll on entrepreneurs as capital has become increasingly scarce. This year’s projections for loans guaranteed by the Small Business Administration are down to $10 billion, which is half the amount of loans guaranteed last year.

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GDP Forecasts from the WSJ

With talk of a second stimulus package circulating, it’s of interest to see what the current forecasts are indicating about the depth of the recession, as well as the “bounceback”. Jim has presented some of his views here. In this post, I examine the implications of the consensus coming from the March WSJ survey article, which indicates continued deterioration in the outlook, but a recovery beginning in 2009Q3.

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The Great Multiplier Debate, New Keynesian Edition

Greg Mankiw cites a study by Cogan, Cwik, Taylor, and Wieland to buttress his arguments that fiscal multipliers are small, especially when considering New Keynesian models. He also provides a startling graphic showing the dynamic multipliers from Romer-Bernstein versus the Taylor (1993) model, incorporating model consistent expectations; this graphic motivates Wieland et al. to remark:

We first show that the assumptions made by Romer and Bernstein about monetary
policy — essentially an interest rate peg for the Federal Reserve — are highly questionable
according to new Keynesian models. We therefore modify that assumption and look at the
impacts of a permanent increase in government purchases of goods and services in the
alternative model. According to the alternative model the impacts are much smaller than
those reported by Romer and Bernstein.

Cogan et al. use a New Keynesian dynamic stochastic general equilibrium (DSGE) model, specifically the Smets-Wouter model (Working Paper version of AER paper here).

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Interesting Econometric Result of the Day: And the Prospects for a Growth Bounceback

The exchange between Brad Delong and Greg Mankiw ([1] [2], followed up by [3] [4]) reminded me of some earlier work I’d done with Yin-Wong Cheung on the time series properties of real GDP, back in the “unit root” wars. Briefly, Mankiw was alluding to work with Campbell indicating GDP was well approximated as an ARIMA process, while Delong is arguing that using unemployment, which is trend stationary, indicates that indeed sharper increases in unemployment presage more rapid GDP growth. The former characterization is univariate in nature and the latter is bivariate. Of course, we’ve moved on since those days — the entire VAR and SVAR literature expands the set of variables, but at the cost of greater complexity — but simple characterizations can still be useful.

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Q4 Preliminary Release and Re-thinking That “Massive” Stimulus

The BEA released its preliminary numbers for 2008Q4 GDP. There was little good news in it, as many have observed. [0], [1], [2], [3] Consumption fell even further than first estimated. In an accounting sense, support from exports collapsed. Even the downward revision in inventories, which might have suggested a production rebound in this quarter, seems to incorporate more of a signal of further anticipated declines in demand, at least given the high inventory to sales ratios. And while declining imports add, in a mechanical sense, to output, it certainly hints at a sustained decrease in anticipated economic activity. Figure 1 shows these GDP components.

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Point of Clarification: The Economic Report of the President, 2009

Misinformation in the talk-show world. From today’s Rush Limbaugh show (which is titled “A Teachable Moment on Tax Hikes”):

CALLER: Thank you for taking my call. I just wanted to point out something to you about your comments on taxing, and Obama’s own economic advisors agree with you, and it’s in a report that I found online. It’s the Economic Report of the President. It’s issued by the Council of Economic Advisors, which were appointed by Obama, and there’s an entire section in that report that says lowering tax rates stimulates economic growth.

RUSH: That was then. They have removed that from the website. What’s the woman’s name that wrote that? I’m having a mental block. Romer. Christina Romer. She wrote that. She put it on their website and once Obama won: Bam! It came off, and now in its place is: “Spending a dollar generates a dollar and a half.” It used to be, “Reducing taxes every dollar generates a dollar and a half,” or a half a dollar. They’ve totally reworked it. She’s been neutered, as it were.

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