In all the excitement between the Italian crisis and the US lashing out with tariffs to be levied against our allies, it was easy to overlook this event:
Figure 1: Ten year constant maturity Treasury minus three month Treasury bill yield spread on secondary market (blue), and ten year minus two year yield spread (green), both daily, %. Last observation is 6/1. Source: Federal Reserve via FRED, Bloomberg, and author’s calculations.
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Goldman Sachs (Hatzius et al., May 24):
Ongoing rate hikes are likely to tighten financial conditions, at least gradually, and we expect growth to slow to a trend pace through 2019 even with fiscal stimulus still helping. From 2020, when the fiscal impulse ends, the risk of recession looks set to rise, but the lack of cyclical excesses in borrowing and spending suggest that an outright contraction is far from a foregone conclusion—so long as Fed officials manage to prevent a big overheating.
Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. An earlier version appeared in Project Syndicate.
About twenty years ago, while visiting the Research Department of the IMF, Guy Meredith poked his head in my office and wondered aloud whether interest differentials could reliably predict (in the right direction) subsequent exchange rate changes at horizons of three to five years. The resulting paper led in turn to production of this graph:
Figure 1: Panel beta coefficients at different horizons. Notes: up to 12 months, panel estimates for 6 currencies against US$, euro deposit rates, 1980Q1-2000Q4; 3-year results are zero-coupon yields, 1976Q1-1999Q2; 5 and 10 years, constant yields to maturity, 1980Q1-2000Q4 and 1983Q1-2000Q4 (last observation corresponds to exchange rate data). Source: Chinn (2006).
Remember?
“Borrowing and spending by the public sector will crowd out investment and growth in the private sector.” Paul Ryan, “Path to Prosperity” (April 2012).
If one uses a three year window, it’s three times: February, 1986, May 1995, September 1997. Three other times, a recession follows.
The last time around — when people were saying “this time is different” — was May 2005. Inversion occurred in February 2006 (and in November 2006, skepticism of impending recession). The recession is dated by NBER as starting in December 2007.
For additional discussion of the implications of a flattening yield curve, see Michael Klein’s EconoFact article, and (for cross country empirics) Chinn and Kucko (2015).
Today, we are fortunate to present a guest contribution written by Ashoka Mody, Charles and Marie Visiting Professor in International Economic Policy, Woodrow Wilson School, Princeton University. Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments.
The euro has appreciated 10 percent against the Swiss franc (CHF) over the past year. The U.S. dollar and the Japanese yen have not made similar gains vis-à-vis the franc. Tracking the franc’s movements relative to the major currencies gives an unusual window onto the deflation-fighting credentials of the world’s major central banks. It illustrates, in particular, the European Central Bank’s half-hearted efforts to fight the risk of price deflation. Financial markets have come to believe that the ECB will prematurely tighten monetary policy: hence, despite brief episodes of depreciation, the euro will tend to stay strong, hurting economic prospects in several eurozone member countries.
Today, we are fortunate to present a guest contribution written by Ashoka Mody, Charles and Marie Visiting Professor in International Economic Policy, Woodrow Wilson School, Princeton University. Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments.
The European Central Bank (ECB) was set up as the most independent of all central banks. Its independence also made it unaccountable. Freed from public accountability, the ECB’s decisions have been swayed by its management’s ideological preferences and by national interests. The consequence is that some eurozone countries are now subject to long-term deflation risk and are locked into a currency that is too strong for their economies.
I had an interesting discussion on a range of topics with David Beckworth which you can
listen to as a podcast from Macro Musings.
A recent article on the predictive abilities of yield curves (Shrager/Quartz) includes a nifty interactive which allows you to look at yield curves over time. Below, I do a snapshot comparison, across the world.
Figure 1: Ten year-three month term spread (blue bars), as of 9 July 2016. China observation is Five year-three month term spread. Euro ten year rate is for Germany. Source: Economist, data as of April 18.
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