The External Sector And Financial Crises

If we look at the full history of financial crises around the world, one could argue that crises related to external debt and/or fixed exchange rates are dominant. Such crises could represent an entire chapter of this book. However, I will only offer a brief overview of the subject. From the perspective of recession forecasting, the addition of a fixed exchange rate regime adds a new wrinkle to analysis: at what point will the peg fail, causing a crisis? As I will discuss below, this is quite different than an analysis of the domestic economy, which one might hope is amenable to something resembling econometric analysis.

Recession Probability Forecasting Models

This article discusses a wide class of models: models which attempt to offer a recession probability estimate, based on variables that are not just aggregate activity variables. Models with inputs that are aggregate economic variables were the subject of a previous article and can be viewed as offering an alternative recession definition. Therefore, they are essentially coincident indicators of recessions – although they might offer a recession diagnosis earlier than “official” recession determinations are made. Instead, the models of interest here are those that use variables that are believed to have some leading information, and so can offer an inflation forecast ahead of the actual recession start.

(Note: This is an unedited excerpt of a section of a manuscript of the first volume of a book on recessions. It is an expanded version of a previously published article on my website.)

Can Fiscal Policy Prevent Recessions?

The focus of my upcoming book is on recession forecasting, and not policy responses towards recessions. However, I expect that this is a subject of interest to many of my readers, so I will offer a brief outline of some of the literature.

(Note: this is an unedited first draft of a section from my manuscript book on recessions. For a typical standalone article, it is too long. However, I do not want to spend time stripping out information that should appear in a book. I could have split it into multiple parts, but I did not feel there was a natural splitting point. And yes, I went a bit nuts with footnotes.)

In Vacation Mode, Slight Delay...

I like keeping to a schedule for publishing new articles, but I think I might slip this week. Was on vacation in the U.S., and my mind is still in vacation-mode. I might be able to do a short article soon, but more likely will be pushed to the weekend. After that, I should be back to my weekly "publish on Wednesday" mode for the rest of (Northern Hemisphere) summer.

I am supposed to be concentrating on getting "Recessions: Volume 1" finished; there's only a small amount of new content to add, so it is just revisions at this point (along with adding new charts, some of which might make it onto the blog). Still on track for a release before December (based on past trends).

Brief Comments On Libra And Online Commerce

Facebook has led a consortium which has unveiled a white paper on a proposed Libra cryptocurrency. It is described as being backed by a multi-currency portfolio of government bonds, and so it might be looked at as a currency basket. I am not an expert on Libra, but I just wanted to comment on the pros and cons of such a basket for small online commerce players (such as BondEconomics.com). I also conclude with a short discussion of systemic risk posed by this platform.

Fed...

Although I believe the Fed ought to cut rates as a preventative move (if I put aside my heterodox views on interest rate policy), I found it very unsurprising that the Fed did not budge this meeting. One interpretation of the news flow is that the Fed is setting up for a cut in the next meeting, but my bias is that they will wait. A few strong data points will reduce the pressure to cut.

Since I am not in the forecasting or investment recommendation business, I am not the best person to ask what the Fed will do over the next few meetings. I just want to note that the historical bar for rate cuts now is quite high; the only question is whether Powell is more flexible, which would break the continuity of the Fed's policy stance.

Why Specifying r, g Makes No Sense Whatsoever

I ran across yet another article discussing how the r>g condition constrains fiscal policy. (For those who are not big fans of this stuff, that means that the long-term average real rate of interest is greater than the long-term real GDP growth rate.) I explain in this short post why any analysis that is premised on these concepts makes no sense.