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Text of the page (random words):
ion debt and recovery debt bulge debt good and bad debt is not credit debt productivity debt to gdp debt to gdp in comments def credit def debt def economic activity def financial cost def gdp def general equilibrium def inflation def inside money def investment def issue and reissue def laffer limit def outside money deflation demand pull inflation disarray dpd echoes economic forces economics v the economy eroc erosion of debt evolution of the excuse expectations factors failure s embrace fallacy of composition fcm fed policy federal spending feedback loops final spending financial cost financialization five words five digit years forget about debt fpi fred free banking era full disclosure fun with the mpc gang8 gds gold shortage gresham s law gross domestic spending growth rate calc growth phase growth historical revisionism hoarding hodrick prescott household debt hover craft how to pay for it humor because you might not know if i didn t say i couldn t sleep iceberg inflation introduction is it ego captain jerry says krugman laffer curve limits long and variable loops malaise matched set fekete math problems medium of account military spending milton friedman mmt money multiplier more debt than money is policy motives moving average new tools of policy non linear not only household debt oil parameters for debt pfi policy predicting recession price controls printing vs spending problem x productivity questions r reading and writing red and green reduction reviews scott sumner sequence 2 serfdom simulacron simulated evidence slack special report spreadsheeting stagflation standard deviation star trek stimulus sumner symmetry in deception taxes taylor rule the difference between debt and credit the economy is transaction the k r shift the long decline the supply side the tint knob they don t know timeline tongue in cheek tot ulc umic unsustainable urgency verdoorn waste fraud abuse withering shoots zoho the new arthurian economics copyright 2010 2018 arthur shipman tuesday january 30 2018 there is one thing reading credit financial conditions and monetary policy transmission the preview pdf from the aea it s really good we study the influence of private nonfinancial credit in the dynamic relationship between financial conditions and monetary policy and macroeconomic performance in the u s from 1975 to 2014 specifically we examine the role of private nonfinancial credit in conditioning the response of the u s economy to impulses to financial conditions and monetary policy they want to see if high debt creates problems nothing is more important at this stage of the game nothing we use a broad measure of credit to households and nonfinancial businesses provided by banks other lenders and market investors we follow conventional practice to measure high credit by when the credit gap credit to gdp ratio minus its estimated long run trend is above zero that s what we looked at yesterday how they figure the credit gap i m okay with it now sort of in addition to credit growth and the credit gap they use a financial conditions index financial conditions indexes are summary measures of the ease with which borrowers can access credit a brief description to incorporate financial conditions we construct a financial conditions index fci combining information from asset prices and non price terms such as lending standards for business and household credit following aikman et al 2017 in studies of monetary policy transmission fcis represent the ease of credit access which will affect economic behavior and thus the future state of the economy also periods when the fci is low indicating financial conditions are tighter than average are associated with worse overall economic performance the unemployment rate is higher 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 t...