In my previous post, I presented evidence that the oil price increase over 2007:H2-2008:H1 made a significant contribution to the slowdown in consumption spending in general and decline in spending on domestic automobiles in particular. Here I discuss why this should be regarded as a key development that turned the slowdown in growth into a recession.
“Trade finance is collapsing”
…said Victor K. Fung, the chairman of the Li & Fung Group, the giant supply chain management company that connects factories in China with retailers in the United States and Europe. “We’ve got orders we can’t ship right now.”
Source: “As Trade Slows, China Rethinks Its Growth Strategy,” NYT Jan 1, 2009.
The oil shock and recession of 2008: Part 1
This is the first in what I’m planning will be a series of posts discussing the contribution that the energy price spike of 2008 made to our present economic difficulties. In this first installment, I revisit a very interesting research paper on the response of consumer spending to energy price increases written by Lutz Kilian (Professor of Economics at the University of Michigan), and Paul Edelstein (Senior Economist for Decision Economics). I first brought this paper to the attention of Econbrowser readers in the spring of 2007. I thought now would be a good time to take a look at how well the equations in Edelstein and Kilian’s paper can describe what we saw happen in the later part of 2007 and first half of 2008.
Aggregate Demand and Finance and the Collapse in Trade
From “Trade-Finance Pinch Hurts the Healthy,” WSJ, 12/22/08:
The global financial crisis is drying up the financing that firms depend on for trade. That’s making the global recession nastier and deeper than it otherwise would be.
As with all kinds of credit these days, financial institutions are making less trade finance available and charging more for it. But the squeeze in trade stands out because it pinches otherwise healthy companies that should be driving a recovery in global commerce. Already, the World Bank predicts trade will contract next year for the first time since 1982.
“Stuff Happens”: the Bush Administration’s Economic Stewardship
As we near the end of the year, and the end of eight years of Bush economic policy, I think it’s useful to look back. The White House has recently tangled with the NYT regarding what got us into the current economic crisis [0] (see also [1]). This comes on the heels of the Paulson argument that he would not have done anything different, had he known the full extent of the looming crisis. This leads me to wonder how we should view the Bush Administration’s stewardship of the economy.
Links for 12-24-08
Today I outsource to a couple of links I found interesting:
Dave Cohen on oil prices.
Stephen Gordon on economists’ fatal flaw.
James Morley on the need for a new Fed-Treasury accord.
ZIRP and the exchange rate…and other macro variables
Several months ago, I discussed the implications of a model of the exchange rate wherein Taylor rule fundamentals — the output [0], inflation and exchange rate gaps — were central (post). In that paper [pdf], I showed that Taylor rule fundamentals outperformed purchasing power parity, interest rate parity, and the monetary model of exchange rates in terms of in-sample fit, at least insofar as the dollar/euro exchange rate is concerned.
Federal Reserve balance sheet
Here I survey how we got here, where things currently stand, and what it all means.
Fiscal stimulus: the case for block grants
A few thoughts on how the federal government might best implement a fiscal stimulus.
Credit Crunch or Not
One of the debates regarding the current financial crisis is whether in fact there is a crisis, or whether in fact the financial system is operating normally. I’ve been skeptical myself of the “times are normal view”, but here is some evidence that the credit crunch is real. The findings also reinforces my view that un-nuanced reliance on highly aggregated volume statistics (e.g., Chari et al. 2008) is likely to result in misleading inferences (See the rejoinder from the Boston Fed’s economists). From the conclusion to Tong and Wei (2008) ungated version of Tong and Wei: