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March 8, 2013

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 02 Mar 2013 12:33 AM PST
Everyone at the conference seemed to like this model of endogenous banking crises (me included -- this is the non-technical summary, the paper itself is fairly technical):
Booms and Systemic Banking Crises, by Frederic Boissay, Fabrice Collard, and Frank Smets: ... Non-Technical Summary Recent empirical research on systemic banking crises (henceforth, SBCs) has highlighted the existence of similar patterns across diverse episodes. SBCs are rare events. Recessions that follow SBC episodes are deeper and longer lasting than other recessions. And, more importantly for the purpose of this paper, SBCs follow credit intensive booms; "banking crises are credit booms gone wrong" (Schularick and Taylor, 2012, p. 1032). Rare, large, adverse financial shocks could possibly account for the first two properties. But they do not seem in line with the fact that the occurrence of an SBC is not random but rather closely linked to credit conditions. So, while most of the existing macro-economic literature on financial crises has focused on understanding and modeling the propagation and the amplification of adverse random shocks, the presence of the third stylized fact mentioned above calls for an alternative approach.
In this paper we develop a simple macroeconomic model that accounts for the above three stylized facts. The primary cause of systemic banking crises in the model is the accumulation of assets by households in anticipation of future adverse shocks. The typical run of events leading to a financial crisis is as follows. A sequence of favorable, non permanent, supply shocks hits the economy. The resulting increase in the productivity of capital leads to a demand-driven expansion of credit that pushes the corporate loan rate above steady state. As productivity goes back to trend, firms reduce their demand for credit, whereas households continue to accumulate assets, thus feeding the supply of credit by banks. The credit boom then turns supply-driven and the corporate loan rate goes down, falling below steady state. By giving banks incentives to take more risks or misbehave, too low a corporate loan rate contributes to eroding trust within the banking sector precisely at a time when banks increase in size. Ultimately, the credit boom lowers the resilience of the banking sector to shocks, making systemic crises more likely.
We calibrate the model on the business cycles in the US (post WWII) and the financial cycles in fourteen OECD countries (1870-2008), and assess its quantitative properties. The model reproduces the stylized facts associated with SBCs remarkably well. Most of the time the model behaves like a standard financial accelerator model, but once in while -- on average every forty years -- there is a banking crisis. The larger the credit boom, (i) the higher the probability of an SBC, (ii) the sooner the SBC, and (iii) -- once the SBC breaks out -- the deeper and the longer the recession. In our simulations, the recessions associated with SBCs are significantly deeper (with a 45% larger output loss) than average recessions. Overall, our results validate the role of supply-driven credit booms leading to credit busts. This result is of particular importance from a policy making perspective as it implies that systemic banking crises are predictable. We indeed use the model to compute the k-step ahead probability of an SBC at any point in time. Fed with actual US data over the period 1960-2011, the model yields remarkably realistic results. For example, the one-year ahead probability of a crisis is essentially zero in the 60-70s. It jumps up twice during the sample period: in 1982-3, just before the Savings & Loans crisis, and in 2007-9. Although very stylized, our model thus also provides with a simple tool to detect financial imbalances and predict future crises.
Posted: 02 Mar 2013 12:24 AM PST
This paper from the SF Fed conference might be of interest (it's a bit technical in some sections):
Monetary Policy Alternatives at the Zero Bound: Lessons from the 1930s U.S. February, 2013 Christopher Hanes: Abstract: In recent years economists have debated two unconventional policy options for situations when overnight rates are at the zero bound: boosting expected inflation through announced changes in policy objectives such as adoption of price-level or nominal GDP targets; and large-scale asset purchases to lower long-term rates by pushing down term or risk premiums - "portfolio- balance" effects. American policies in the 1930s, when American overnight rates were at the zero bound, created experiments that tested the effectiveness of the expected-inflation option, and the existence of portfolio-balance effects. In data from the 1930s, I find strong evidence of portfolio- balance effects but no clear evidence of the expected-inflation channel.
(The discussants seemed to like the paper, but the results for expectations channel drew more questions than the results for the portfolio-balance effects.)
Posted: 02 Mar 2013 12:03 AM PST
Posted: 01 Mar 2013 11:36 AM PST
Tim Duy:
If Not For That Pesky Sequester, by Tim Duy: This morning's Wall Street Journal headline on the sequester included this quote:
"If they could get this fixed, the economy is poised to take off," Bank of America Corp. Chief Executive Brian Moynihan said in an interview.
I believe this is largely correct, albeit "take off" is perhaps a bit strong. The US economy looks to have shaken off some of last year's doldrums, particularly in manufacturing and the housing recovery is set to accelerate further this year. While clearly some external headwinds remain, notably the ongoing economic disaster that is Europe, I tend to think these will have only a second-order impact on the US economy. The immediate concern is obviously the impact of the sequester and earlier tax hikes, especially considering the evolving views of the impact of fiscal policy. That said, while I find the timing of these policy changes unfortunate and believe they place an unnecessary speedbump in the recovery process, their impact should fade as the year progresses.
Also bolstering the outlook is that the Federal Reserve is most likely to continue the large scale asset purchase program throughout much of this year. That was the message of Federal Reserve Chairman Ben Bernanke this week as he minimized concerns that the risks of additional easing outweighed the benefits. I expect a similar message tonight. The initial impact of the sequestration will likely place enough downward pressure on the economy which, when coupled with still low inflation (low enough that additional easing would not be unreasonable), should be enough to keep the hawks at bay.
Earlier this week we learned that home sales continue to rise:
Yes, to be sure sales remain at very low levels. But it is the direction that matters now, and the direction is positive. In and of itself, the positive direction of housing is consistent with ongoing economic expansion (those ECRI guys are not likely to catch a break). And while there has been some commentary calling into question the quality of the January numbers, I would counter with signals from the latest ISM manufacturing report indicate that at least the underlying trend of improvement held in February:
"Business seems to be on an uptick. The normal seasonal downturn for us has been much shorter and not as severe as in the past four years." (Furniture & Related Products)
"Demand indicators are robust. Supply is constrained. Pricing is escalating." (Wood Products)
Speaking of manufacturing, that too is looking more robust. Core-manufacturing orders have staged a remarkable rebound in recent months:
Likewise, the ISM numbers were generally positive. Headline, and new orders, and production:
Moreover, even the external indicators were looking better. Most important in my mind is the improvement in new import orders, a signal of solid underlying domestic demand:
Finally, while the employment index slipped slightly, it still holds in expansion territory:
Were it not for the sequester, and the already evident impact on defense spending, manufacturing would be experiencing even stronger performance.
Changing tax laws created havoc in the personal income data, first boosting the December figure as taxpayers drew income and capital gains into the waning days of 2012 to avoid higher taxes and then dropping the January number on tax hikes, including the end of the payroll tax credit:
Still, courtesy of a drop in the saving rate as households adjusted to the tax hike, consumer spending continues to grind upward:
I anticipate the spending numbers to remain on the soft side in the near term as the impact of tighter fiscal policy continues to work its way through household budgets.
None of this is meant to imply that economics conditions are rosy, just that the economy continues to move in the right direction and was likely poised for stronger growth in 2013 if not for tighter fiscal policy. The anticipated impacts of tighter policy are expected to further widen the output gap:
And note that, still contrary to the expectations of those who believed Fed policy would send prices surging ever higher, inflation remains well under control, as would be consistent with an economy running below potential:
The challenge is not too much inflation; the challenge is too little inflation. Despite the generally positive direction of the economy, there remains room for additional monetary and fiscal stimulus. I doubt we get more of the former, and we are already seeing the opposite of the latter. Not exactly the optimal policy mix.
And I would admit to uncertainty about the sustainability the recovery over the longer term; I am still not confident we can exit smoothly from the zero bound. That, however, might not be a concern until 2016 or 2017 (assuming the Fed starts increasing rates in 2015). As far as the hear and now is concerned, I anticipate that 2013 is setting the stage for a stronger 2014.
Bottom Line: Near term trends are positive, and would be more so if not for the sequester. That said, I don't expect the near term to be sufficiently positive to derail the path of monetary policy. Fed hawks will still defer to Bernanke for the foreseeable future.
Posted: 01 Mar 2013 10:10 AM PST
I was on the radio with conservative radio host Lars Larson earlier this week. Here's a link to the interview:
Economics Professor Mark Thoma makes me wonder about the other nuts that are teaching our kids...
(I haven't listened to it, and won't...)
Posted: 01 Mar 2013 05:04 AM PST
I am here today:
In 1913, President Woodrow Wilson signed the Federal Reserve Act into law, and the Federal Reserve System was created. In recognition of the centennial of the Fed's founding, the Economic Research Department of the Federal Reserve Bank of San Francisco is sponsoring a research conference on the theme "The Past and Future of Monetary Policy."
Morning Session Chair: John Fernald, Federal Reserve Bank of San Francisco
8:15 AM Continental Breakfast
8:50 AM Welcoming Remarks: John Williams, President, Federal Reserve Bank of San Francisco
9:00 AM  Robert Hall, Stanford University, Ricardo Reis, Columbia University, Controlling Inflation and Maintaining Central Bank Solvency under New-Style Central Banking  Discussants: John Leahy, New York University, Carl Walsh, University of California, Santa Cruz
10:15 AM Break
10:35 AM Christopher Gust, Federal Reserve Board, David Lopez-Salido, Federal Reserve Board, Matthew Smith, Federal Reserve Board, The Empirical Implications of the Interest-Rate Lower Bound, Discussants: Martin Eichenbaum, Northwestern University, Christopher Sims, Princeton University
11:50 AM Break
12:00 PM Lunch – Market Street Dining Room, Fourth Floor, Introduction: Glenn Rudebusch, Director of Research, Federal Reserve Bank of San Francisco, Speaker: Lars Svensson, Deputy Governor, Riksbank
Afternoon Session Chair: Eric Swanson, Federal Reserve Bank of San Francisco
1:15 PM Anna Cieslak, Kellogg School of Management, Northwestern University, Pavol Povala, Stern School of Business, New York University, Expecting the Fed, Discussants: Kenneth Singleton, Stanford Graduate School of Business, Mark Watson, Princeton University
2:30 PM Break
2:45 PM Frederic Boissay, European Central Bank, Fabrice Collard, University of Bern, Frank Smets, European Central Bank, Booms and Systemic Banking Crises, Discussants: Lawrence Christiano, Northwestern University, Mark Gertler, New York University
4:00 PM Break
4:15 PM Christopher Hanes, SUNY Binghamton, Monetary Policy Alternatives at the Zero Bound: Lessons from the 1930s U.S., Discussants; Gary Richardson, University of California, Irvine, James Hamilton, University of California, San Diego
5:30 PM Reception – West Market Street Lounge, Fourth Floor
6:15 PM Dinner – Market Street Dining Room, Fourth Floor, Introduction: John Williams, President, Federal Reserve Bank of San Francisco, Speaker: Ben Bernanke, Chairman, Federal Reserve Board of Governors

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