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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.
Output Gap Measurement and Prospects in the Wake of the Crisis
Different concepts of potential GDP
For serious macroeconomists, the magnitude (or existence) of the output gap is a central factor for determining the appropriate policy actions (see for instance Weidner and Williams). In several recent posts, I’ve discussed the variety of approaches to estimating the output gap [0] [1]. A recent symposium on Projecting Potential Growth published by the Federal Reserve Bank of St. Louis is an excellent resource for anybody who wants to think seriously and carefully about the challenges in estimating this variable. In the lead article entitled “What Do We Know (And Not Know) About Potential Output?”, the authors Susanto Basu and John Fernald write:
Looking for an exit
In addition to testifying before Congress, Federal Reserve Chair Ben Bernanke today tried to explain the Fed’s plans and options directly to the public through an op-ed in the Wall Street Journal. Here I provide some background on what Bernanke’s talking about in terms of an “exit strategy” for the Fed, and offer some thoughts on his remarks.
The Failure of Macroeconomics?
This must be the period of soul searching, with the Economist engaging upon multi-article exegeses on where mainstream macro went wrong [1], [2], [3]. Alternatively, I think this is a happy time for some economists outside the (perceived) mainstream, who can now chortle “I told you so”. One recent example is by Mario Rizzo.
Natural gas and oil prices
Since the start of the year, the price of crude oil has risen about 40% while the price of natural gas has fallen by about 40%. Can that divergence be maintained?
Links for 2009-07-17
Some quick remarks about the evidence for economic recovery, central bank independence, and Goldman Sachs.
In the news
Casey Mulligan on the Stimulus: Stock-Flow Mismatch, Sectoral Stimulus Mismatch, and Construction Crowding Out
In today’s Economix post, Casey Mulligan argues that the greater than predicted unemployment numbers should not be ascribed to the negative effect of the stimulus, but rather to bigger than anticipated negative shocks.
We cannot blame the Obama administration for failing to predict June’s 9.5 percent unemployment rate. That result just shows the size of the shocks hitting the economy: Even the best forecasters can miss the unemployment rate by almost two percentage points, even when forecasting fewer than six months ahead.
Concerns about the Fed’s New Balance Sheet
That’s the title of a chapter I contributed to a new book edited by John Ciorciari and John Taylor entitled The Road Ahead for the Fed. The book grew out of a conference held at Stanford University in March.