From Bloomberg two days ago:
…”There’s no hope for export demand to recover any time soon,” said Wang Qian, a Hong Kong-based economist at JPMorgan Chase & Co. “How fast imports recover depends on how soon the government’s stimulus package kicks in and creates real demand in major industries.”
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.
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).
Detroit is still down, and the count begins on whether that means out.
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.
A trillion dollars used to be a sum that never naturally came up in normal conversation. Now all of a sudden, it’s the standard unit we seem to be using to talk about our economic problems and what we’re trying to do about them. Fortunately, I think I finally got a handle on what $1 trillion really means.
How low can stock prices go, and how worried should you be?
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.