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Text of the page (random words):
and rising and real gdp growth is significantly lower and a positive impulse to financial conditions stimulates economic activity but also leads over time to a build up in credit and ultimately subpar growth you get the picture so what did they learn from their study we find the following results first credit is an important channel by which impulses to financial conditions affect the real economy we find that positive shocks to financial conditions are expansionary and lead to increases in real gdp decreases in unemployment and increases in the credit to gdp gap they find that policy works but not always however when the credit to gdp gap is high initial expansionary effects dissipate but lead to further increases in credit which in turn lead to a deterioration in performance in later quarters when credit growth is sustained and the credit gap builds following looser financial conditions the economy becomes more prone to a recession in a high credit environment instead of getting more economic growth you get more credit growth and more recession but it is not only pro growth policy that is undermined by high levels of debt restraint is undermined as well when the credit gap is low impulses to monetary policy lead as expected to an increase in unemployment a contraction in gdp and a decline in credit however when the credit gap is high a tightening in monetary policy does not lead to tighter financial conditions as expected and has no effect on output unemployment and credit in other words a high level of debt makes policy less effective we test whether the transmission of monetary policy to forward treasury rates differs significantly between high and low credit gap periods and find there is less impact in high credit gap states in other words a high level of debt makes monetary policy less effective in addition we evaluate whether the nonlinearities in economic performance may reflect factors other than credit such as whether financial conditions are tight or loose but find that the nonlinear effects are related to loose financial conditions only when credit is high reinforcing our findings that credit has an independent role in explaining performance these findings are simply astonishing remember it s not just some clown in the corner making graphs for his blog who is coming up with these things it is people from the bank of england and the federal reserve central bank economists saying things i would be happy to say things i am happy to repeat but then they also say these empirical results can be useful for structural models that could link credit to financial conditions or monetary policy and allow for nonlinear effects of shocks to economic performance based on credit useful for making models i was hoping for so much more they want to see if high debt creates problems nothing is more important they point out that their result their empirical result supports the literature on the role of credit starting with bernanke and gertler 1989 since 1989 this is 2018 it s 29 almost 30 years they ve known that a high level of debt or credit as the bankers call it creates problems for the economy isn t it time to use these findings for something other than making models how long do we have to wait for that to happen and there is one thing that i cannot get past the last sentence in the last paragraph taken together our results suggest that theory and policy should address the role of credit in the transmission of monetary policy and financial conditions in particular economic dynamics of particular relevance to policymakers appear significantly different when credit to gdp has grown significantly faster than average for some time this dynamic bears on the costs and benefits of using monetary policy to lean against the wind and prevent the buildup of credit svensson 2016 gourio kashyap and sim 2016 moreover it points to the benefit from additional research evaluating the potential for macroprudential policies to reduce the vulnerabilities associated with excess credit it s all good right up to that last sentence where the cat escapes the bag they think it would be good to come up with policies to reduce the vulnerabilities associated with excess credit not policies to prevent credit from rising to the level of excess credit no no policies to reduce the vulnerabilities so that we can have excess credit and not be so exposed to the troubles that it creates they want to be able to expand credit further dammit they still think like bankers posted by the arthurian at 4 00 am 4 comments monday january 29 2018 are you high sometimes it is important to distinguish between the trend and the trend of data yesterday s post looked at the trend of debt relative to gdp looked at how to look at the trend if the debt to gdp ratio is pushed up by a bubble i m not comfortable with the idea that the trend goes up i think the trend is where it would have been without the bubble and the bubble is an anomaly likewise if the debt to gdp ratio is pushed down by unacceptably high inflation i m not comfortable saying that the trend goes down the trend is where it would have been without the inflation and the inflation is an anomaly of course these thoughts depend on a where it would have been version of the trend which is as fanciful a measure as potential gdp or the natural rate of unemployment but i m not comfortable with the idea of taking debt in a normal economy adding in debt from bubbles figuring something like a moving average of the two and calling that average the trend it s just not right the trend is the trend and the bubble is the bubble you don t average them together and call that the trend still there may sometimes be reasons to ignore the where it would have been line i ve been reading credit financial conditions and monetary policy transmission the preview pdf 39 pages from the aea by david aikman of the bank of england and andreas lehnert nellie liang and michelle modugno of the federal reserve board it is strikingly good i interrupted my reading of the aea pdf to write yesterday s post when i saw how they decide whether the credit to gdp ratio is high or low they figure the trend bubbles and all and compare the ratio to the trend they use a slow moving trend meaning it varies more slowly than the ratio itself much more slowly they use a smoothing factor of 400 000 when the standard value is only 1600 so their trend line is nearly straight graph 1 private non financial credit relative to gdp with trend this graph is from the powerpoint download at the aea page the graph shows their trend line in red above trend is high below trend is low their methodology allows them to describe debt as high or low even in a high debt environment this allows them to say for example that debt was low in 1997 and low again in 2012 if you happen think debt went high around 1980 then you see everything after 1985 on the graph as high you may not be comfortable saying that debt in 2012 was low you are not alone in the pdf they note that even after falling significantly from its peak in 2009 the level remains elevated relative to previous decades in other words debt is high their statement is a strong objection to the methodology that they use i like the honesty i take their statement as evidence that the authors of the pdf are not completely comfortable saying that debt was low in 2012 this is big to me it means they are on the right track they agree with me they do justify the methodology by saying everybody does it that way we follow the literature in defining the credit to gdp gap as the difference between the ratio of nonfinancial private sector debt to nominal gdp and an estimate of its trend that doesn t make it right of course but wait for it they do make it right why do i object so strongly to their trend calculation because comparing the debt ratio to a rising trend makes the ratio seem lower than it really is they understate the level of debt by circular logic they figure how high debt is by comparing it to the trend when all the while high debt has been driving the trend up it s madness but it turns out there is method in their madness they say a concern with using measures based on credit to gdp is the upward trend in the ratio as an empirical matter this is dealt with by focusing on the gap with respect to an estimate of the trend designed to be slow moving they worry that critics might question the validity of their work because of the upward trend of the ratio in order to circumvent that criticism they measure how high the debt to gdp ratio is by comparing it to its trend if the ratio is above the trend they call it high this way when they say debt is high no one can contradict them okay for me their methodology weakens their argument but if it strengthens their argument in the eyes of someone who doesn t see debt as a problem it s worth it good job guys but don t forget after you convince the critics that you re onto something you ll have to open their minds further and get them to move away from comparing debt to trend to determine whether debt is high just tell em their logic is circular posted by the arthurian at 4 00 am 3 comments labels 400k smoothing sunday january 28 2018 seeing past the aberrations in debt to gdp total debt relative to gdp graph 1 total debt relative to gdp i ve seen a lot of people point out the low flat area between 1965 and 1984 debt was low then they say and the economy was good maybe but the low flat part is low and flat because of the inflation of that era people seem to think debt stopped growing for a while in fact we were adding to debt more rapidly during the flat years than before from 1952 thru 1964 the average annual debt growth was 6 6 from 1965 thru 1980 it was 9 9 debt growth was 50 more during the flat it looks flat because inflation made ngdp increase as fast as debt it wasn t magic that kept debt low in those years it was the raging inflation inflation changed the path of the debt to gdp ratio and created the low spot inflation was an aberration the low debt ratio was a result of it if you look at it the way i do you can almost see the path that debt to gdp would have taken if we never had that crazy inflation you could draw a straight line connecting 1960 to the late 1980s bypass the low spot and see what the path of debt might have looked like without that inflation something like this graph 2 as above but annual data with a trend line added the years from 1987 thru 1997 occur shortly after the great inflation they look on trend to me i show them in red i had excel create a straight line trend based on that period in the early years before the great inflation the trend line black is a perfect fit for the years from 1956 to 1960 and it s a very good fit from 1952 to 1963 those early years show the same trend as the years shown in red after the great inflation the blue line low and flat during the inflation is an aberration i didn t have to try a dozen times to make the graph show what it shows i looked at the years between the great inflation and the great recession and picked dates where the blue line appeared to be on trend rather than returning to or departing from it then i put a linear trend line on those years and it came out just as you see above i did fiddle with it some after that i changed the trend line to exponential then i added a few years to the end of the red zone and watched the trend line change as i added them i was exploring this is what i found graph 3 as above annual data with an exponential trend the trend line fits the red zone just about as well as it did before it fits the years 1952 1963 even better than it did before and at the end of the graph in 2016 the blue line meets the trend line the two lines appear to show that debt to gdp has returned to trend after a decade long recovery from the tech and housing bubbles perhaps you can imagine the graph ten years out with the exponential curve continuing and the debt to gdp data clinging to it it could make you think debt finally got back to normal in 2016 and that could make the next ten years very good indeed come to think of it this is my vigor story again from a different perspective posted by the arthurian at 4 00 am 0 comments saturday january 27 2018 where we stand the fred blog has a post dated 11 january which shows this graph the green line quarterly data ends at q3 2017 the others appear to show q4 preliminary it s a mess the lines are all over the place however since the start of 2017 the lines converge toward a 3 growth rate then move upward together it s a little early to draw conclusions of vigor from this graph sure but remember in march it will be two years that i have been predicting vigor to begin in 2018 we are at the bottom now ready to go up i said in march of 2016 the first quarter of 2016 where we are right now is the bottom the next month i said i predict a boom of golden age vigor beginning in 2016 and lasting eight to ten years it has already begun in two years everyone will be predicting it and in august of that year i wrote what i m looking at amounts to vigor starting about a year into the first term of the next u s president why because debt per dollar private debt per dollar of m1 money was at bottom in 2016 q1 and ready to rise debt per dollar is an indicator of financial cost for the economy as a whole and because with debt service reaching a low financial cost was low creating favorable conditions for wages and profit in the non financial sector i don t bring this up to brag that my prediction is right i don t even know yet if my prediction is right i bring it up because if we do soon experience the economic vigor that i expect it means the data i m looking at may be more important than most people realize or maybe it was just dumb luck on my part and donald trump deserves all the credit for improving the economy see also where we stand dated 26 august 2017 and my vigor page edward harrison 15 jan 2018 for the first time in several years we are seeing economic growth everywhere in the global economy no one is talking about recession it s just the opposite people are raising economic forecasts and worried about overheating in two years i said two years ago everyone will be predicting it posted by the arthurian at 4 00 am 0 comments friday january 26 2018 shiller what drives these decade long swings in confidence consumer confidence is lifting the economy but for how much longer by robert j shiller jan 26 2018 amid the constant turmoil in domestic and global politics these days the economy s steady expansion has been a source of comfort but look more closely and you will find that economic growth rests on a surprisingly amorphous base consumer confidence we know that consumer confidence is a critically important advance indicator of economic booms and busts at the moment it is forecasting a continuing expansion yet the troubling fact is that we don t fully understand how and why co...
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