Does high unemployment mean that there's nothing to worry about in terms of inflation?

Since I'll be trying to answer this question quantitatively using some equations, I'll begin with some notation. Let ut denote the unemployment rate as of the end of a particular quarter t; currently ut = 9.8 for t corresponding to 2009:Q3. I'll presume that the question we're interested in is what sort of inflation rate we should expect over the next two years, and so I'll let πt+8 denote the average inflation rate (quoted at an annual rate) over the next 8 quarters as measured by the price index for personal consumption expenditures (data from FRED). Of course at the current time (t = 2009:Q3) we don't yet know what the value of πt+8 is going to be-- that's what we're trying to predict.

One way to come up with a prediction is to

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p style="text-align: left;"By Claus Vistesen: Copenhagenbr //pp style="text-align: left;"(please click on pictures for better viewing)br //pp style="text-align: left;"br //pp style="text-align: center;""Being a Keynesian means being a Keynesian in emboth/em the good and bad times."/p p style="text-align: center;"emAndres Velasco (Finance Minister in Chile) [1]/em/p pbr //ppIt has been a while since I last had a thorough look at Chile (a href="http://chileeconomy.blogspot.com/2008/10/chiles-economy-in-perspective-october.html"here/a and a href="http://chileeconomy.blogspot.com/2008/08/economic-growth-in-chile.html"here/a); more specifically, the last time I had Chile under the loop was in October 2008 and thus around the time when the global economy was about to enter two quarters (Q4-08 and Q1-09) of absolute horror. Whether we are past the worst at this point in time is debatable and I am, personally, skeptical with regards the narrative of second derivatives and green shoots, but it is hard to deny that it does represent a narrative and a fairly strong one too. In this context I thought ...

Note: This is a beta version. I will probably be going over it a couple of times before I am completely happy with it. Moreover, please note that all pictures can be seen in a bigger format by clicking on the which will open a new window or tab

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"Being a Keynesian means being a Keynesian in both the good and bad times."

Andres Velasco (Finance Minister in Chile) [1]

It has been a while since I last had a thorough look at Chile (here and here); more specifically, the last time I had Chile under the loop was in October 2008 and thus around the time when the global economy was about to enter two quarters (Q4-08 and Q1-09) of absolute horror. Whether we are past the worst at this point in time is debatable and I am, personally, skeptical with regards the narrative of second

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Here's an update of US imports and export behavior. The trade collapse remarked upon a couple of months ago is still in play.

Figure 1: Log goods import ex.-oil from NIPA (blue), and log goods exports ex.-agricultural goods (red), all in Ch.2000$, SAAR. NBER recession dates shaded gray. Source: BEA, GDP 2009Q1 preliminary release of 28 May 2009, NBER, and author's calculations.

The annualized drop in non-oil goods imports was 60.5% in 2009Q1 (log terms), while that of non-agricultural goods exports was 51.5% (both in log terms).

The misprediction by the standard (i.e., old fashioned) macroeconometric models (see [1]) documented in an earlier post persists. The model is given by:

Imp = α 0 + α 1 y + α 2 r

Where Imp is real imports, y is real income, and r is the real value of the dollar.

I estimate an error correction version of this

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div style="text-align: justify;"span style="font-weight: bold;"TARP repayment will drive hit to earnings for common/spanbr /Merrill Lynch /BAM notes that when TARP pfds were issued in Oct, related warrants caused a portion of the investment to be allocated to paid-in-capital (“PIC”) with this balance set to slowly accrete to preferred stock over 20 quarters. Repayment of TARP by GS, JPM and MS will force a reversal of remaining warrant value (through pfd dividend line).br /br /span style="font-weight: bold;"Warrant repay will drive Equity hit, but likely 3Q event/spanbr /They also expect each Co. will pay the government to extinguish attached warrants, but uncertainty remains as to valuation (e.g. what volatility will be used in valuing?). Whatever the value, they expect it to be a hit to common equity (without going through the Pamp;L) sometime in 3Q. The numbers are significant (anywhere from $700mn to $1bn+, by our calculation), but given the strong capital ...

I've been thinking about trying to convey exactly how startling the drop in U.S. imports has been. First, take a look how much non-oil goods imports (in real terms) have dropped, relative to, for instance, GDP.

Figure 1: Log GDP (blue, left scale), log goods import ex.-oil from NIPA (red, right scale), estimated from trade release (purple, right scale), all in Ch.2000$, SAAR. 2009q1 estimate is based on actual January and February data and March estimate incorporating continued 5% decline from February. NBER recession dates shaded gray. Source: BEA, GDP final release of 26 March 2009, February trade release, NBER, and author's calculations.

The annualized drop in these imports was 36.5% in 2008Q4 (log terms). In addition, with non-oil imports dropping about 5% (non-annualized, in logs) in the first two months of 2009, 2009Q1 imports seem set continue the drop. In Figure 1, I've assumed that the

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The exchange between Brad Delong and Greg Mankiw ([1] [2], followed up by [3] [4]) reminded me of some earlier work Iqd done with Yin-Wong Cheung on the time series properties of real GDP, back in the "unit root" wars. Briefly, Mankiw was alluding to work with Campbell indicating GDP was well approximated as an ARIMA process, while Delong is arguing that using unemployment, which is trend stationary, indicates that indeed sharper increases in unemployment presage more rapid GDP growth. The former characterization is univariate in nature and the latter is bivariate. Of course, we've moved on since those days -- the entire VAR and SVAR literature expands the set of variables, but at the cost of greater complexity -- but simple characterizations can still be useful.

This brings me to the results Cheung and I obtained. In "Further Investigation of the Uncertain Unit Root in U.S.

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Suppose by 2009Q4, GDP is 0.13% below 2008Q3 levels, real equity wealth is 35.2% below end-June levels, and real nonequity wealth is 6% below end-June levels. Further assume that the real Fed Funds rate remains at 2008Q3 levels (-2.45%). Then, the conditional estimate of 2009Q4 consumption will be 2.16% below 2008Q3 levels. This implies a 3% y/y decline in consumption by 09Q3; the only comparable instance of such a decline is 1951Q3, when consumption declined y/y by 2.3% (all percent calculations in log terms).

Figure 1 depicts the path of consumption under these assumptions, and using error correction models for durables and nondurables consumption, and a VAR in first differences for services consumption.

Figure 1: Log real total consumption (blue) and log sum of forecasted consumption components (red), in Ch.2000$, SAAR. NBER defined recession dates shaded gray. Dashed line indicates beginning of forecast period. Source: BEA, NIPA release of 30 ...

Or, What would be the net effect on investment of the McCain tax plan?

Figure 1: Real nonresidential fixed investment (blue) and investment in equipment and software (red), SAAR. NBER defined recession dates shaded gray. Source: BEA GDP release of August 28, 2008, and NBER.

As noted in a previous post, the McCain and Obama campaigns have many different components. The McCain tax plan involves a series of tax reductions aimed at lowering the cost of capital facing firms, with the aim at spurring investment; and as Jim pointed out, investment is a key determinant in our future prosperity. On the other hand, one particularly substantial difference with the Obama plan is that, as scored by the respective campaigns' officials and tabulated by the nonpartisan Tax Policy Center, the McCain tax plan involves a $1.3 trillion dollar larger cumulative budget deficit over FY2009-2018. This suggests to me countervailing

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By Claus Vistesen: Copenhagen

There are many perspectives through which to look at economic development and growth. Geography, institutions or perhaps just plain good old physical capital accumulation are all important parameters. This small piece suggests a further metric and attempts to frame the argument with Chile as a case study.

Specfifically, this note explains the process known as the demographic dividend and conceptualizes it in a Chilean context. The analysis shows how Chile during the last two decades has benefited from the dividend proxied by the increasingly favorable trend in overall age structure of the society. By some measures Chile’s demographic dividend is thus ending during these very years. Yet, by adapting a slightly broader definition of the optimal working age and subsequent productivity profile, it appears that Chile still finds itself in the proverbial sweet spot and will continue to do so for the next decade. Coupled with

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