Primer: Causality In Models

One important consideration for indicator construction is the notion of causality (using systems engineering terminology). A non-causal model is a model where the output depends upon the future values of inputs. In the absence of access to a time machine, such a model cannot be directly implemented in the real world. In practice, a non-causal model output is “revised” as new datapoints are added to input series. The result is that we cannot use the latest values of the series to judge the quality of previous “predictions” of the model.

U.S. Breakeven Inflation Ticking Up

The recent rise in Treasury yields has largely been a rising breakeven inflation story. Admittedly, it was not a large move, but the 10-year breakeven appears to have bounced off the 1.5% level.

Primer: The Fiscal Multiplier

The concept of the fiscal multiplier can be viewed as simple, but there are many potential complexities to analysis. In this text, I keep the discussion simple (with a nod towards the complexities). There are multiple potential definitions of the fiscal multiplier, but I will use a straightforward one: it is the coefficient relating the expected change of nominal GDP based on an assumed change in a fiscal variable. For example, if a policy change scenario is expected to raise the fiscal deficit by $100 million (relative to baseline), and the modelled change to nominal GDP is $150 million higher than the baseline, we could say that the multiplier is 1.5 from the deficit to GDP.

The definition deliberately uses the vague term “fiscal variable” for reasons to be discussed later.

Energy Crisis Leading To Publishing Pause...

We had a pretty hefty storm hit Quebec yesterday (up to 100 km/hour winds), and electricity supply has been intermittent since. I will be skipping today's article as a result of the disruptions.

Quick Comment On Takeda Article

Masahiko Takeda wrote an article "Will Japan’s consumption tax hike fix its fiscal woes?" (h/t Tom Hickey at Mike Norman Economics). I just wanted to comment on some statements about Modern Monetary Theory (MMT), as well as fiscal sustainability, and "independent fiscal institutions."

Oil Price Spikes And Recessions

(This article is a short unedited excerpt from my manuscript on recessions. I just added the section, as I found that it was a key missing topic of discussion. I discussed this subject in my earlier book - Interest Rate Cycles: An Introduction.)

Quick Update On Recession Probability Models

This is a short update of an article I wrote on activity-based recession probability models (link). The difference between this class of models and those relying on forward-looking information is better underlined as a result of recent events. Activity-based models are much less jumpy than those that rely on the yield curve (for example).