Multipliers, under Differing Monetary Regimes

Here’s another installment in a series attempting to move the discussion from “my estimate vs. your estimate” (or “prior”, as the case may be) [1] [2] [3] [4] [5] [6] to something more constructive (and hopefully more nuanced). From the conclusion to “Expectations and Fiscal Stimulus” by Troy Davig and Eric M. Leeper:

This paper has embedded estimated Markov-switching rules for U.S. monetary and fiscal policy into an otherwise conventional calibrated DSGE model with nominal rigidities to deliver some quantitative predictions of the impacts of government
spending increases. When monetary and fiscal policy regimes vary — from active monetary/passive fiscal to passive monetary/active fiscal to doubly passive to doubly active — government spending multipliers can vary widely. An increase in government spending of $1 in present value raises output by $0.80 in present value under
[Active Money/Passive Fiscal] AM/PF, while it raises output by as much as $1.80 in present value when monetary policy is passive. In our simple model, this translates into a decrease in consumption of $0.20 in present value under AM/PF, but an increase in consumption of about $0.80 in present value under passive monetary policy.

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Good News and Bad News from the GDP release

Some additional observations (see Jim Hamilton’s take, as well as others) on the GDP release: (1) the five year revision indicates that GDP was larger than we thought, but it also declined faster in 2009Q1; (2) GDP growth was lower throughout 2008 than earlier estimated; (3) GDP growth in 2008Q2 at 1.5% SAAR would have likely been at zero or negative in the absence of the January 2008 stimulus package in which case; (4) GDP q/q growth would have been negative from 2008Q1 to 2009Q2; (5) the case that ARRA directly affected 2009Q2 GDP is limited, in a mechanical sense since most of the increase in government spending is accounted for by defense spending; and (6) the US ex-oil ex-agricultural net exports to GDP ratio is back to where it was in 1998Q1.

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Been down so long it looks like up

The Commerce Department reported today that the seasonally adjusted real value of the nation’s production of goods and services fell at a 1% annual rate during the second quarter. That’s about as bad as things ever got during the recession of 2001. But after the -5.4% and -6.4% growth rates that the Commerce Department now says characterized 2008:Q4 and 2009:Q1, some folks are cheering today’s news. Reminds me a little of how I’ve seen people in Minnesota take off their shirts for the first 40oF day of spring, a little shocking to a traveler from San Diego.

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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).

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Green jobs

One of our local papers did a better job of reporting this issue than I have seen from any of the big guys, in part because the reporter started with the question that I think everyone should be asking: what does it mean to create a green job? Here’s what I said:

If you have two people making the same amount of energy that one person used to make, would you want to describe that as creating one new job? I would say no, you’re significantly reducing productivity. Ultimately, creating jobs has to do with promoting productivity….
We might well make a decision that we want to be promoting economic growth in a way that’s more friendly toward the environment. That’s a fine decision to make, but I don’t think we ought to be doing it under the pretense we’re creating jobs for people.

Three Pictures: China’s Exchange Rate and Trade Balances

There’s plenty of commentary on the ongoing China-US Strategic and 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.

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Are Unemployment Statistics Meaningless? Are Spillover Effects Zero?

Casey Mulligan rebuts my post asserting slack in the economy by posing the scenario “Construction Workers Teaching Kindergarten” (Note: Mulligan’s blog is down; here is an alternative link currently working – 8/2/09). He writes:

Econbrowser now claims* that the stimulus bill can be effective, because unemployment rates are high (whatever that means) in health care and education. Let’s take a look at employment changes Dec 2007 – June 2009 (millions) by industry:

 

Total nonfarm payrolls: -6.5

Construction: -1.3

Manufacturering: -1.9

Education and Health: +0.7

How exactly is fiscal policy going to create 3.5 million jobs by primarily hiring people in education and health? I see only two scenarios, both absurd and/or dishonest:

He argues these two scenarios are: (1) “The construction workers become kindergarten teachers” or (2) “The people in construction and manufacturing stay unemployed.”

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Looking for an exit: Part 2

In my previous post I commented on Ben Bernanke’s recent communication of the Fed’s exit strategy for getting its balance sheet and daily operations back to historical norms. I suggested that one necessary ingredient to convince the public that we will see a return to a stable monetary regime would be a credible explanation of how the United States government will be able to meet its enormous current and implicit future fiscal obligations. Today I’d like to discuss a second element that I feel is missing from the exit strategy articulated by Bernanke, and this is a compelling vision of what a healthy financial market not propped up by the Treasury and the Fed would look like.

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