Tuesday , July 23 2019
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James Hamilton

James Hamilton

He is Professor of Economics at the University of California, San Diego

Articles by James Hamilton

Libra: economics of Facebook’s cryptocurrency

29 days ago

Facebook last week announced plans for Libra, a new global cryptocurrency. The name seems to be a marriage of the words “livre”, the French currency throughout the Middle Ages based on a pound of silver, and “liber,” which is Latin for “free.” Facebook claims that Libra will give the freedom to easily transmit funds across borders to the 1.7 billion adults in the world without access to traditional banks.
Money is defined by three attributes. It is a unit of account (prices of most things you buy are quoted in dollars), a medium of exchange (you can deliver payment for those items by transferring your dollars to the seller), and a store of value (you can hold your wealth in the form of cash dollars until you want to spend it).
Why do the pieces of paper we call dollars have value? When

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Yield curve inversion

May 29, 2019

The gap between long-term and short-term interest rates has narrowed sharply over the last year and is now dipping into negative territory. Historically that’s often been a signal that slower economic growth or even an economic recession could lie ahead.
Gap between average interest rate on 10-year Treasury bond and 3-month Treasury bill during the last month of the quarter (1953:Q2 to 2019:Q1) and May 1-24 for 2019:Q2. NBER dates for U.S. recessions shown as shaded regions.
This relation is sometimes summarized with a regression that tries to predict average real GDP growth over the next year as a function of recent GDP growth rates and the current interest-rate spread (t-statistics in parentheses):
Here Yt is 100 times the natural log of real GDP in quarter t and i10y and i3m are the

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Tools of monetary policy

May 9, 2019

I just finished a new paper on current U.S. monetary policy operating procedures. Here’s the abstract:
The Federal Reserve characterizes its current policy decisions in terms of targets for the fed funds rate and the size of its balance sheet. The fed funds rate today is essentially an administered rate that is heavily influenced by regulatory arbitrage and divorced from its traditional role as a signal of liquidity in the banking system. The size of the Fed’s balance sheet is at best a very blunt instrument for influencing interest rates. In this paper I compare the current operating system with the historical U.S. system and the procedures of other central banks. I then examine strategies for transitioning from the current system to one that would give the Federal Reserve better tools

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U.S. economy keeps growing

April 26, 2019

The Bureau of Economic Analysis announced today that U.S. real GDP grew at a 3.2% annual rate in the first quarter of 2019. That’s better than the 2.2% average rate since the recovery from the Great Recession began in 2009:Q3, and even a little better than the average 3.1% growth over the last 70 years.
Real GDP growth at an annual rate, 1947:Q2-2019:Q1, with the 1947-2018 historical average (3.1%) in blue and post-Great-Recession average (2.2%) in red.
And year-over-year growth keeps climbing.Top panel: quarter-to-quarter real GDP growth, quoted at an annual rate, 2009:Q4 to 2019:Q1. Bottom panel: year-over-year real GDP growth. Vertical lines denote first-quarter observations.
That brings the Econbrowser Recession Indicator Index in at 2.4%, among the lowest levels we ever see. That

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Measuring unemployment and labor-force participation

March 29, 2019

The underlying data from which the U.S. unemployment rate and labor-force participation rate are calculated contain numerous inconsistencies– if one of the numbers economists use is correct, another must be wrong. I’ve recently completed a research paper with Hie Joo Ahn that summarizes these inconsistencies and proposes a reconciliation.
The data that everyone uses are based on a survey of selected addresses. An attempt is made to classify each adult living at that address as employed E, unemployed but actively looking for a job U, or not in the labor force N. The next month the surveyors try to contact the same address and ask the same questions. In any given month, some households are being asked the questions for the first time, others for the second time, and so on up to eight

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The long expansion continues

March 1, 2019

The Bureau of Economic Analysis announced yesterday that U.S. real GDP grew at a 2.6% annual rate in the fourth quarter of 2018. That’s below the 3.1% average for the U.S. economy over the last 70 years, but better than the 2.2% average rate since the recovery from the Great Recession began in 2009:Q3.
Real GDP growth at an annual rate, 1947:Q2-2018:Q4, with the 1947-2018 historical average (3.1%) in blue and post-Great-Recession average (2.2%) in red.
One can also look at the year-over-year growth rate, which smoothes out some of the measurement error in the quarterly growth numbers. This climbed throughout 2018, and we ended the year with the highest year-over-year growth rate since 2015:Q2.
Top panel: quarter-to-quarter real GDP growth, quoted at an annual rate, 2009:Q4 to 2018:Q4.

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Factors in Unemployment Dynamics

December 22, 2018

That’s the topic of a new FEDS Note that I just published with Hie Joo Ahn. Here’s what we discuss:

The U.S. unemployment rate averaged 8.4% during the first five years of recovery from the Great Recession of 2007-2009, the weakest recovery on record. But as the expansion continued, unemployment continued to decline and by 2018 reached the lowest levels in almost half a century. Why did unemployment remain so high for so long, and what factors contributed to the recent lows?

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Perspective on the stock market

December 9, 2018

Some people are getting a little spooked by recent stock market movements. Here I offer a few thoughts.
Although there has been a dramatic drop in the S&P500 since October, the market had been up pretty significantly from the start of the year up to that point. As of Friday, the net change between the start of the year and now has been inconsequential.
Cumulative change since start of year of U.S. S&P 500 (green), Shanghai composite (blue) and German DAX (purple). Source Yahoo Finance.
If somebody should be worried, it should be the Chinese or Europeans, where the drop in stock prices so far this year has been fairly painful. One interpretation is that bad news for them is finally catching up with the U.S.
It’s interesting that the rise and fall in U.S. equity prices this year paralleled

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Measuring monetary policy shocks

December 4, 2018

What are the effects on the economy when the Fed raises interest rates? This is a key question in empirical research, but is notoriously hard to answer. The reason is that when the Fed raises interest rates, it usually does so in anticipation of a stronger economy or rising inflation. If we look at what happens to inflation or output following an interest rate hike, it is impossible to distinguish the effect of the Fed’s actions from the effects of the changing fundamentals that led the Fed to act in the first place. New research by a graduate student at UCSD may have finally solved this problem.
A common approach that recent researchers have taken has been to focus on what happens to interest rates within a narrow window of time, say 30 minutes to one day, around a monetary policy

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Warren B. Hamilton, 1925-2018

November 2, 2018

From the Denver Post:
Warren Hamilton passed away at his home in Golden, Colorado on October 26, 2018 at age 93. His primary career was as a research scientist with the US Geological Survey in geologic, and later geophysical branches. He was a geologist known for integrating observed geology and geophysics into planetary-scale syntheses describing the evolution of Earth’s crust and mantle. After retirement in 1995, he became a Distinguished Senior Scientist in the Department of Geophysics, Colorado School of Mines where he taught classes through fall of 2017. Warren also taught classes through winter of 2017 with the Osher Lifelong Learning Institute. He was a member of the National Academy of Sciences, and a holder of the Penrose Medal, the highest honor of the Geological Society of

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Strong GDP growth, weak fundamentals

October 26, 2018

The Bureau of Economic Analysis announced today that U.S. real GDP grew at a 3.5% annual rate in the third quarter. That’s the second quarter in a row that the number has come in above the 3.1% average for the U.S. economy over the last 70 years, and is well above the 2.2% average rate since the recovery from the Great Recession began
Real GDP growth at an annual rate, 1947:Q2-2018:Q3, with the 1947-2018 historical average (3.1%) in blue and post-Great-Recession average (2.2%) in red.
This brings the Econbrowser Recession Indicator Index all the way down to 1.1%, among the lowest levels we ever see. The U.S. remains clearly in the expansion phase of the business cycle.
GDP-based recession indicator index. The plotted value for each date is based solely on information as it would have

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Comment policy

August 25, 2018

Econbrowser has always welcomed a wide range of opinions and spirited discussion from commenters, and will continue to do so. To preserve civility of the discussion, we have two rules. First, comments referring to someone’s racial or ethnic characteristics will not be published. Second, we will block comments that are pure insults with no intellectual arguments.

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Measuring global economic activity

August 15, 2018

Measuring the level of global economic activity is of key interest. But the measures we have on variables like industrial production don’t cover all countries and are only available with a significant lag. Michigan Professor Lutz Kilian suggested in an influential paper published in 2009 that we could get a useful timely indicator by looking at average shipping costs. I recently had a chance to look into the details of how that series is constructed and have some suggested improvements.
Kilian’s basic idea is that changes in world economic activity are the primary driver of the demand for shipping, and that this higher demand shows up in the short run as an increase in the real cost of shipping. Kilian calculated a nominal index of shipping costs (which I’ll denote by x) by starting with

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Great second-quarter GDP report

July 27, 2018

The Bureau of Economic Analysis announced today that U.S. real GDP grew at a 4.1% annual rate in the second quarter. That’s significantly better than the 2.2% average growth we’ve seen since the Great Recession ended in 2009, and is also a little above the 3.1% average for the U.S. economy over the last 70 years.Real GDP growth at an annual rate, 1947:Q2-2018:Q2, with the 1947-2018 historical average (3.1%) in blue and post-Great-Recession average (2.2%) in red.
Our latest reading for the Econbrowser Recession Indicator Index is 2.7%, staying at very low levels. The U.S. remains clearly in the expansion phase of the business cycle.
GDP-based recession indicator index. The plotted value for each date is based solely on information as it would have been publicly available and reported as

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Worries about the yield curve

July 1, 2018

Several people have asked me if the flattening yield curve is a warning of impending weak growth or even a recession. My answer is not yet. Here’s why.
Usually long-term bonds offer a higher yield than short-term bonds, a feature described by the yield curve, which plots the interest rate on bonds as a function of maturity. The slope of the curve is often summarized by the spread between the yield on a 10-year U.S. Treasury security and a 3-month Treasury bill. A lot of economic research has concluded that if that spread becomes lower, it may predict slower economic growth. If the spread becomes negative, that is, if a 3-month T-bill offers a higher yield than a 10-year bond (referred to as an “inverted” yield curve), it’s as useful a predictor of a pending economic recession as we have.

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Is the economy overheating?

May 5, 2018

The Bureau of Labor Statistics announced yesterday that the unemployment rate was down to 3.9% in April. That’s nearly as low as it’s been any time in the last half century. Does that mean the U.S. economy faces some problems ahead?

Worries about the unemployment rate getting too low are usually framed in terms of the Phillips Curve. One simple formulation describes the Phillips Curve as a negative relation between the change in the inflation rate and the level of unemployment.
Vertical axis: year-over-year change in the inflation rate, where the inflation rate is measured as the year-over-year percent change in the quarterly implicit price deflator on personal consumption expenditures (first quarter to first quarter, 1949-2018). Horizontal axis: unemployment rate in April of each year.

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A little slower growth

April 27, 2018

The Bureau of Economic Analysis announced today that U.S. real GDP grew at a 2.3% annual rate in the first quarter. That’s a modest slowdown from the 3.1% average we saw over the previous 3 quarters. 3.1% is also the average growth rate for the U.S. economy over the last 70 years. But the Q1 reading is pretty much on par with the 2.2% average growth since the Great Recession ended in 2009.
Real GDP growth at an annual rate, 1947:Q2-2018:Q1, with the 1947-2018 historical average (3.1%) in blue and post-Great-Recession average (2.2%) in red.
Slightly softer first-quarter growth is something that’s become pretty typical in the recent data. Since 2010, first-quarter real GDP growth averaged 1.3% at an annual rate, compared with 2.5% for the other three quarters. We get a smoother impression

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2018 Econbrowser NCAA tournament challenge

March 11, 2018

It’s that time of year again! By which I mean, the once-in-a-lifetime opportunity to enter the eleventh annual Econbrowser NCAA tournament challenge! All right, so last year you had a chance to enter the tenth annual challenge, which was kind of similar. But whether or not you tried it last year, here’s an all new roll of the dice to see how well you can predict the outcome of this year’s U.S. college men’s basketball tournament. If you want to participate, go to the Econbrowser group at ESPN, do some minor registering to create a free ESPN account if you haven’t used that site before, and fill in your bracket before Thursday at noon!

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A skeptical view of the impact of the Fed’s balance sheet

February 26, 2018

That’s the title of a paper with David Greenlaw, Managing Director of Morgan Stanley, Ethan Harris, head of global economics research at Bank of America Merrill Lynch, and Kenneth West, professor of economics at the University of Wisconsin, which we presented at the U.S. Monetary Policy Forum annual conference in New York on Friday.
Assets held by the Federal Reserve quintupled between 2007 and 2014. The initial phase of this expansion took the form of emergency lending in the fall of 2008, shown in purple in the graph below. These doubled the Fed’s balance sheet within the space of a few months, but were subsequently repaid and are now off the books. Our paper does not discuss the efficacy of the Fed’s lending programs.
Federal Reserve assets, Dec 18, 2002 to Jan 3, 2018. Wednesday

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The U.S. economy keeps growing

January 26, 2018

The Bureau of Economic Analysis announced today that U.S. real GDP grew at a 2.6% annual rate in the fourth quarter. That is better than the 2.2% we’ve seen on average since the Great Recession ended in 2009, though below the historical average growth rate for the U.S. economy of 3.1%.

Real GDP growth at an annual rate, 1947:Q2-2017:Q4, with the 1947-2017 historical average (3.1%) in blue and post-Great-Recession average (2.2%) in red.
Solid growth over the last three quarters has brought our Econbrowser Recession Indicator Index down to 2.4%. The U.S. remains clearly in the expansion phase of the business cycle.
GDP-based recession indicator index. The plotted value for each date is based solely on information as it would have been publicly available and reported as of one quarter

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Negative interest rates

January 5, 2018

A few years ago, most economic models presumed that interest rates were subject to a lower bound of zero. Why lend a dollar to someone who only promises to pay you back 99 cents, when you could just hold on to the dollar yourself? But we now have several years of experience from Sweden, Denmark, Switzerland, Japan, and the European Central Bank in which the central bank successfully induced negative interest rates in hopes of stimulating a greater level of spending on goods and services. We have enough data now to take a look at how much that seems to have accomplished, and update my earlier discussion of this topic.
First, it’s useful to understand how the central bank could bring about negative interest rates. Consider for example the European Central Bank. Traditionally the ECB would

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Steady economic growth continues

October 27, 2017

The Bureau of Economic Analysis announced today that U.S. real GDP grew at a 3.0% annual rate in the third quarter. That is close to the long-term historical average of 3.1%, and better than the 2.1% we’ve seen on average since the Great Recession ended in 2009.
Real GDP growth at an annual rate, 1947:Q2-2017:Q3, with the 1947-2017 historical average (3.1%) in blue and post-Great-Recession average (2.1%) in red.Solid growth over the last two quarters has brought our Econbrowser Recession Indicator Index down to 3.3%. The U.S. remains clearly in the expansion phase of the business cycle.
GDP-based recession indicator index. The plotted value for each date is based solely on information as it would have been publicly available and reported as of one quarter after the indicated date, with

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Another event to study

September 21, 2017

One of the ways economists have tried to estimate the effects of the Fed’s program of large-scale asset purchases (LSAP) is using event studies of how the market responds in the thirty minutes following Fed statements of changes in the program. Yesterday’s announcement from the Federal Reserve that it is starting a gradual process of reducing its balance sheet gives us one new data point for such efforts.
Here’s what happened to the yield on 10-year Treasuries yesterday as measured by the TNX contract on the Chicago Board Options Exchange (divide by 10 to translate into the annual interest rate in percentage points, and remember this is reported in Central Daylight Time). The long-term interest rate rose about 3 basis points (0.03%) in response to the news, consistent with the conclusion

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The great unwind begins

September 20, 2017

The Federal Reserve announced today that it will begin reducing the size of its balance sheet next month in very modest and deliberate steps. One reason the Fed is moving so slowly is that they don’t want a repeat of the May 2013 taper tantrum, in which a surprise hint that the Fed might slow the rate at which it would be growing its balance sheet led to a spike up in long-term interest rates. But there may also be another reason why the Fed is contracting its balance sheet so cautiously.
Historical Federal Reserve assets (Wed values, Dec 12, 2002 to Sep 13, 2017). Treasuries net discounts: U.S. Treasury securities held outright plus unamortized premiums on all securities held outright minus unamortized discounts on all securities held outright. Agencies: Federal agency debt securities

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Reappoint Janet Yellen as Fed chair

August 25, 2017

Four years ago, I made the case why Janet Yellen would make an excellent chair of the Federal Reserve. As testimony to the power of our mighty blog, President Obama followed our advice and nominated her for a four-year term. So I thought I’d call attention now to a few of the reasons why President Trump should ask Yellen to serve a second term.

Janet Yellen

The economy and financial markets have performed very well while Yellen has been at the helm. To be sure, the Federal Reserve is just one factor in that, but a factor nonetheless. Unemployment has reached a 16-year low and stock prices made all-time highs. Monetary policy and financial markets are returning to normal and banks’ balance sheets are healthy. Markets have confidence in U.S. monetary policy, and so do I.
I’ll

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U.S. begins ninth year of economic expansion

July 28, 2017

The Bureau of Economic Analysis announced today that U.S. real GDP grew at a 2.6% annual rate in the second quarter. That is below the long-term historical average of 3.1%, but better than the 2.1% we’ve seen on average since the Great Recession ended in 2009.
Real GDP growth at an annual rate, 1947:Q2-2017:Q2, with the 1947-2017 historical average (3.1%) in blue and post-Great-Recession average (2.1%) in red.
This helped our Econbrowser Recession Indicator Index to ease down to 8.2%, confirming the U.S. remains steadily in the expansion phase of the business cycle.
GDP-based recession indicator index. The plotted value for each date is based solely on information as it would have been publicly available and reported as of one quarter after the indicated date, with 2017:Q1 the last date

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Are we in a new inflation regime?

July 2, 2017

Federal Reserve Bank of Chicago President Charles Evans got some attention recently with the following statement:
In a world of global competition and new technology, I think competition is coming from new places. New partners are choosing to merge and sort of changing the marketplace and [bringing] more competitive pressures on price margins…If that’s the case, and I think that’s just speculative at this point, then it means that we need even more accommodation to get inflation up.

Here are some of the data that might support such a statement. The existence of a Phillips Curve is one of the Fed’s core assumptions: as unemployment gets lower, the inflation rate should pick up. We’ve seen a huge drop in unemployment over the last six years. And in response, inflation did … pretty much

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