Recent Posts

Wednesday, October 29, 2014

For Fiscal Policy, The Future Is Now

The problem with modern analysis of fiscal policy is that it has fallen into the trap of following a certain conventional wisdom: it has to be very forward looking, in fact it is meant to have an analysis horizon longer than the expected lifetime of the Universe (depending upon the cosmological model). Upon reflection, I think the correct philosophy was the one expressed by the famed American Football coach George Allen: The Future Is Now.


Sunday, October 26, 2014

Book Review: Secular Stagnation: Facts, Causes and Cures

The Centre for Economic Policy Research (CEPR) has recently published the free eBook "Secular Stagnation: Facts, Causes and Cures" (edited by Coen Teulings and Richard Baldwin), which is a series of 13 articles by prominent economists on the topic of secular stagnation, along with a summary by the editors. (It is also available at Amazon for the Kindle, but it is not free in that format.) This review will act as a brief summary of some of the articles, along with some high level comments. I am currently writing a sequence of articles on "slow growth", and I will address some of the topics within the eBook at a later date in more detail.

Thursday, October 23, 2014

New York Fed DSGE Model: The Circularity of Productivity Shocks

The New York Federal Reserve has published the Dynamic Stochastic General Equilibrium (DSGE) model it uses to produce forecasts, in a staff report, and a 5-part series on the Liberty Street Economics blog. It provides an introduction to a modern DSGE model. The analysis they provide of the behaviour of the model during the financial crisis illustrates the inherent weakness of the DSGE modelling assumptions, as the effect of fiscal policy is assumed out of existence, and too much importance is attached to Total Factor Productivity (TFP) shocks.

Sunday, October 19, 2014

Secular Stagnation Is Not Particularly New

In this article, I will review some economic history for the United States since the early 1990s. The objective is to argue that "secular stagnation" - which is generally viewed as a new thing which has popped up since the financial crisis for some reason or another - is really just an extension of existing trends that have been in place for at least 20 years. It's just that abnormal cyclical factors disguised underlying disappointing economic outcomes. The implications of this view is true are mixed. It is not impossible to revert to what is viewed as "normal" growth during an expansion, but we can expect that the economy will get stuck in the mud when recessions inevitably occur.

Thursday, October 16, 2014

Markets Panic In October (Again)

Chart: 30-Year U.S. Treasury Bond Yield
The panic in risk asset markets - and rally in good quality government bonds - may be the result of investors being poorly positioned going into year end. That said, economic developments outside the United States are poor, and so there are fundamental reasons for weakness in those markets. The drop in oil prices, normally a boon for the United States economy, will now have a mixed impact, courtesy of the boom in drilling.

Wednesday, October 15, 2014

Using Stock-Flow Norms To Explain Secular Stagnation (Part 2)

Having looked at the increasing demand for financial assets in the first part of this essay, we now turn to look at the supply of financial assets. The business sector is unable to supply the required amount of financial assets, leaving balancing supply and demand to the government and household sectors. Once the housing bubble burst, the government sector was put into the position of being the key source of supply. This can only be accomplished by large fiscal deficits, which implies slow growth. Since this slow growth was the result of policies that were aimed at increasing growth, it is unlikely that this structural situation will be easily changed.

Sunday, October 12, 2014

Using Stock-Flow Norms To Explain Secular Stagnation (Part 1)

Stock-Flow norms are a critical component of stock-flow consistent (SFC) modelling. Using this concept, we can see why economic growth has become slower in recent economic cycles, in particular the latest one. Unfortunately, this analysis indicates that the current slow growth - often referred to as secular stagnation - is structural, and not easily remedied. The reason is that there is considerable demand for savings, and the only way of generating those savings is via government deficits, which only appear if nominal GDP growth is slow. Finally, the fact that the rise of government debt outstanding was the consequence of policies that were aimed at increasing growth rates has the consequence that there is little chance of "fixing the debt", as those other policies would have to reversed.

Due to the length of this essay, I have split it into two parts. (Link to Part 2.)