Friday , January 18 2019
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Menzie Chinn

Menzie Chinn

He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

Articles by Menzie Chinn

Policy Uncertainty and the Term Spread over the Government Closure

4 days ago

Elevated on the first, up then down on the second.

And that was before Mr. Trump threatened to economically destroy Turkey should they attack US-backed Kurdish forces and berated his acting chief of staff, the record for length of government shutdown was broken, before the release of China trade data…

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“Agent Orange: Trump, Soft Power, and Exports”

4 days ago

That’s the title of a new paper by Andy Rose:
A country’s exports rise when its leadership is approved by other countries. I show this using a standard gravity model of bilateral exports, a panel of data from 2006 through 2017, and an annual Gallup survey which asks people in up to 157 countries whether they approve of the job performance of the leadership of China, Germany, Russia, the United Kingdom and the United States. Holding other things constant, a country’s exports are higher if its leadership is approved by the importer; ‘soft power’ promotes exports. The soft power effect is statistically and economically significant; a one percent increase in leadership approval raises exports by around two-thirds of a percent. This effect is reasonably robust, and different measures of soft

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Adding Insult to Injury

7 days ago

Mr. Trump considers redirecting funds committed to rebuilding Puerto Rico toward the building of the Wall. From WaPo:

Trump has urged the Army Corps to determine how fast contracts could be signed and whether construction could begin within 45 days… The list includes dozens of flood control projects in areas affected by recent natural disasters, including the Texas coastline inundated by Hurricane Harvey and parts of Puerto Rico battered by Hurricane Maria. The military construction budget is also being looked at as a potential source for unspent funds, with billions more potentially available there.
It might be that Mr. Trump believes that only 60 odd people died as a result of Hurricane Maria, instead of the official estimate of nearly 3000, so perhaps he can be excused for sheer

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“International Spillovers of Monetary Policy: Conventional Policy vs. Quantitative Easing”

9 days ago

That’s the title of a fascinating new paper with important policy implications.

This paper evaluates the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies. We employ a novel approach to compare the international spillovers of conventional and balance sheet policies undertaken by the Federal Reserve. In principle, conventional monetary policy affects bond yields and financial conditions by affecting the expected path of short rates, while balance-sheet policy is believed act through the term premium. To distinguish the effects of these two types of policies we use a term structure model to decompose longer-term bond yields into expected short-term interest rates and term premiums. We then examine the relative effects of

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“A Third of a Century of Currency Expectations Data: The Carry Trade and the Risk Premium”

10 days ago

That’s the title of a new paper, coauthored with Jeffrey Frankel, using data extending back to August 1986.

For four decades economists have been finding that the forward discount is a very biased forecast of future changes in the exchange rate. The carry trade makes money, on average. For just as long, they have been debating the appropriate interpretation of the bias. Is it evidence of an exchange risk premium? Under that interpretation, a currency that sells at a forward discount does so not because it is expected to depreciate in the future but because it is perceived as risky. Using data on survey-based expectations over 32 years across 17 currencies, we reject that interpretation of the forward bias. We find that when investors sell a currency at a forward discount, it is indeed

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Jindal-nomics Illustrated

11 days ago

In response to my graph of Louisiana GDP, Manfred asks:

…we have to define what Jindalnomics is or was.
I don’t know for sure, but as shown in this graph, it seems to include large corporate tax breaks.
And if Jindal had had his way, income tax breaks as well.

For completeness’s sake, here is Louisiana GDP, again.
Figure 1: Log real GDP, 2008Q1=0 for US (dark blue), and for Louisiana (chartreuse). Light orange shading denotes Jindal administrations. Source: BEA and author’s calculations. Side point: Manfred has an interesting approach to economics; see this 2017 comment:
Why drop the ACA?Because of liberty, because of free markets, because of competition, because of freedom of choice among many plans, that may or may not be the liking of techno-bureaucrats in Washington and at MIT.I

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Measured Uncertainty and Treasury Spreads, 1/7/19

11 days ago

Figure 1: 10 year-2 year Treasury spread, % (red), 1/7 observation at 1pm Eastern, and Economic Policy Uncertainty index (teal), and 7 day centered moving average (gray bold). Sources: Federal Reserve Board and policyuncertainty.com .

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We Can Make Mexico Pay for the Wall

12 days ago

Just declare an International Emergency. From US Treasury, U.S.C. annotated, Title 50. War and National Defense Chapter 35. International Emergency Economic Powers :

§ 1701. Unusual and extraordinary threat; declaration of national emergency; exercise of Presidential authorities (a)(1) At the times and to the extent specified in section 1701 of this title, the President may, under such regulations as he may prescribe, by means of instructions, licenses, or otherwise– (A) investigate, regulate, or prohibit– (i) any transactions in foreign exchange, (ii) transfers of credit or payments between, by, through, or to any banking institution, to the extent that such transfers or payments involve any interest of any foreign country or a national thereof, (iii) the importing or exporting of

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Treasury Spreads and Measured Policy Uncertainty

13 days ago

Do they matter?

Figure 1: Economic Policy Uncertainty, 7 day centered moving average (gray, left scale), 10 year-3 month Treasury spread (blue, right scale), 10 year-2 year spread (red, right scale), both in %. Orange denotes Trump administration. First orange line at election; second at government closure. Source: policyuncertainty.com, FRED, and author’s calculations.Why should we care? The spreads is of interest for well-known reasons. Interestingly, the economic policy uncertainty index (Baker-Bloom-Davis) seems to presage recessions at six month lags (statistically so, in-sample). I show this in the below graph, where both indicators are lagged 6 months.
Figure 2: Economic Policy Uncertainty (gray, left scale) lagged 6 months, and 10 year-3 month Treasury spread (blue, right scale),

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Louisiana’s Economic Progress since 2005

14 days ago

It’s striking. GDP correlates with oil in recent years, but not always, so why didn’t the magic of Jindalnomics work?

Figure 1: Log real GDP, 2008Q1=0 for US (dark blue), and for Louisiana (chartreuse). Light orange shading denotes Jindal administrations. Source: BEA and author’s calculations.Expect a comment from Manfred…

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Will Dave Brat Do More Damage in Academia than in Congress?

15 days ago

Brat to Liberty University…

to be dean of the business school.
I’ve been curious about what Brat’s writings were ever since I heard him speak (after all, at the time he was the only Ph.D economist in Congress, as far as I know). Here are his works (with Google Scholar citation counts; SSCI counts are usually less):
“A global Kuznets curve?”WG Park and, DA Brat – Kyklos, 1995 – Cited by 58
“Cross-country R&D and growth: Variations on a theme of Mankiw-Romer-Weil,” WG Park, DA Brat – Eastern Economic Journal, 1996 Cited by 11
“Explaining College Freshman Retention Rates across the US with Applications to Schools in Virginia,” CB Pfitzner, D Brat, S Lang – Virginia Social Science Journal, 2011 Cited by 5
“Inputs and Outputs in Virginia Public Education,” D Brat, S Lang, B Pfitzner –

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Guest Contribution: “New Year questions about the economic outlook”

15 days ago

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers.

Five questions about the international economic outlook, from Chosun Ilbo (the leading Korean newspaper), and my replies:
US president Trump and China’s president Xi agreed to a temporary ceasefire, in which the US suspended to impose higher tariffs on Chinese imports next year. How do you see the Trade War is going? How would it affect the global economy next year?
The trade war is not going well, for either the United States or its trading partners. It is good that President Trump, in his December 1 dinner meeting with President Xi in Buenos Aires, decided he would stop making things worse for the

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Is Housing the Business Cycle, 2019?

16 days ago

In 2007, Ed Leamer presented “Housing is the business cycle” at Jackson Hole. In 2018, Leamer himself doesn’t think a recession is imminent, but the following graph certainly gives one pause for thought.

Figure 1: Year on year growth in real residential investment (blue), and in housing starts (red), calculated as 4 quarter log differences. NBER defined recessions shaded gray. Orange denotes Trump administration. Source: BEA 2018Q3 3rd release, BuCensus/HUD, NBER, and author’s calculations.Well, we have not broken through the 0.4 percent decline in civilian employment over six months Leamer used as a threshold, so for now (or as of November), we can rest reasonably assured that we’re not currently in a recession.

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Happy New Year!

16 days ago

Figure 1: Baker Bloom and Davis Economic Policy Uncertainty index, centered 7 day moving average (gray, left scale), and ten year – three month Treasury spread, % (blue, right scale) and ten year – two year spread, % (red, right scale). Source: policyuncertainty.com, FRED and author’s calculations.

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The Year in Review, 2018: Blowhards at Bay?

17 days ago

Last year’s recap was subtitled “Fighting against the normalization of lying”. At least this year, lies are called lies. Now it’s time to shun the liars, and relegate them to where they belong.

January: Stephen Moore continues to lie and lie and lie, as shown in “Further documentation on Stephen Moore is a liar.” He says the Federal deficit is a trillion dollars when it’s been nowhere near that.
Figure 1: Federal budget balance as reported by OMB (bold blue), and CBO projection (dark blue), and implied budget balance under HR 1 Tax Cuts and Jobs Act (pink), in millions of dollars by fiscal year. Source: OMB via FRED, CBO. February: Trump’s economics team projects an incredible (in the literal sense of the word) acceleration in productivity.
Figure 2: Nonfarm real output per hour,

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Treasury Spreads and Measured Economic Policy Uncertainty for 2018

19 days ago

A correlation shows up in the last month or so:

Figure 1: Baker Bloom and Davis Economic Policy Uncertainty index, centered 7 day moving average (gray, left scale), and ten year – three month Treasury spread, % (blue, right scale) and ten year – two year spread, % (red, right scale). Source: policyuncertainty.com, FRED and author’s calculations.

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Guest Contribution: “Six right predictions in 2018”

19 days ago

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers.

I realize that compiling a list of one’s own past forecasts is self-indulgent. But perhaps there are readers who will indulge me too, as I run through six predictions that – it seems to me – were mostly proven right this past year.
Volatility, as measured by the VIX, had been too low and would rise.
The stock market was too high and would fall.
Trump would switch from attacking the Fed for low interest rates, as he had during 2010-2016, to attacking it for raising interest rates.
Prices of oil, minerals, and other commodities would fall.
The December 2017 tax cuts would raise the US budget deficit and

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Is California in Recession? (Part XII)

22 days ago

November coincident indices from the Philadelphia Fed are out. Time to re-evaluate this assessment from a year ago in Political Calculations that California was in recession.

Going by these [household survey based labor market] measures, it would appear that recession has arrived in California, which is partially borne out by state level GDP data from the U.S. Bureau of Economic Analysis. [text as accessed on 12/27/2017]

The release provides an opportunity to revisit this question (the November employment figures are discussed here). It’s (still) unlikely that a recession occurred.

Figure 1: Log coincident index in US (black), and in California (blue), both in logs, normalized to 2011M01=0. Blue arrow at timing of Political Calculations recession conjecture. Source: Philadelphia Fed

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How I Freaked Myself Out: Economic Crisis Management Teams, 2009 vs. 2019

22 days ago

In the wake of the pre-holiday meltdown in the financial markets, I thought for a few minutes about who would be doing crisis management, especially after SecTreas Mnuchin’s ham-fisted attempt to calm the markets. My musings did not calm my nerves. Consider the January 2009 team and the (likely, barring further dismissals) January 2019 team, and you’ll see what I mean.

Surprisingly, I’m not worried by the people who have been appointed to the Fed by Trump. Jerome Powell has, despite the hue and cry from Trump, pursued a relatively sensible process of tightening (even if slightly tighter than I think warranted). Rich Clarida is eminently qualified. So too is the NY Fed President John Williams.
No, my worries are focused on some of Trump’s political appointees. Consider:
Christina Romer

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“Top US Economist Stephen Moore: … Powell Should Resign”

24 days ago

Look no further for the source of Mr. Trump’s economic proclivities. The entire article title: “Top US Economist Stephen Moore: Time for New Pilot at the Fed – Jerome Powell’s Policies Are Disastrous – Powell Should Resign” (12/19):

The Fed has been way too tight. They made a major blunder three months ago with raising the rates. It’s caused a deflation in commodity prices. And I will say this, David, if the Fed raises interest rates tomorrow they should all be fired for economic malpractice.
That quote of Stephen Moore was from December 19th. Then, on Sunday (12/23), Moore spoke on a radio show, as recounted by NewsMax:
After meeting with President Trump and economist Art Laffer last week, Moore told host John Catsimatidis that Trump is considering firing Powell as chairman of the

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Is California in Recession? (Part XI)

25 days ago

November employment figures are out. Time to re-evaluate this assessment from a year ago in Political Calculations that California was in recession.

Going by these [household survey based labor market] measures, it would appear that recession has arrived in California, which is partially borne out by state level GDP data from the U.S. Bureau of Economic Analysis. [text as accessed on 12/27/2017]

The release provides an opportunity to revisit this question (the 2018Q2 state GDP figures are discussed here). It’s (still) unlikely that a recession occurred.

Figure 1: Nonfarm payroll employment in US (black), and in California (blue), both in logs, normalized to 2011M01=0. Blue arrow at timing of Political Calculations recession conjecture. Source: BLS and author’s calculations. According

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Comey, Cohn, Sessions,… Powell?

28 days ago

From Bloomberg, tonight:

President Donald Trump has discussed firing Federal Reserve Chairman Jerome Powell as his frustration with the central bank chief intensified following this week’s interest-rate increase and months of stock-market losses, according to four people familiar with the matter.Advisers close to Trump aren’t convinced he would move against Powell and are hoping that the president’s latest bout of anger will dissipate over the holidays, the people said on condition of anonymity. … 
Fed Chair Powell can only be removed “for cause”. This rather vague term could be stretched by Mr. Trump to rationalize removal, I suppose (I’m not the first to think of this scenario)
Even if Mr. Trump were not able to remove the Fed Chair, the mere “discussion” should be enough to spook the

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Stephen Moore Lies Again

28 days ago

CNN should dump him as a “economic analyst” — he’s nothing more than a propagandist. Yesterday, on CNN, Mr. Moore stated unequivocally:

“…we’ve got the strongest economy we’ve had in 20 years.”
I thought Mr. Moore was referring to unemployment rates, until I read his 2015 Washington Times op-ed casting doubt on the unemployment rate as an accurate metric. Hence, I concluded he must be talking about GDP. Figure 1 shows year-on-year growth rates in real GDP (Ch.2012$), calculated in log terms, with a red dashed line at 3%, the growth rate as 2018Q3.
Figure 1: Year-on-year real GDP growth calculated as log differences (blue), red dashed line at 3% growth equal to 2018Q3 growth rate. Unshaded area pertains to past twenty years. Source: BEA 2018Q3 second release, author’s calculations.As can

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When Will Trump Deliver on the Trade War: Soybeans

28 days ago

Stock market meltdown, government closure, coup d’etat at DoJ, announced exit from Syria, maybe-exit from Afghanistan, tanks on the Russia-Ukraine border, DPRK still developing nukes, and Mattis departs. But at least we’re winning the trade war, right?

Source: Barchart.com, accessed 12/21/2018So, despite the “truce”, soy prices have not recovered measurably. From FarmProgress.com:
China’s return, if it holds, could increase old crop export demand by 50 million or maybe even 100 million bushels. That’s better than nothing, but it doesn’t change potential for global soybean inventories to swell to record levels in coming months. Barring a sudden turn worse in South American weather, the amount of soybeans leftover at the end of the marketing year Aug. 31 will still be terrible, just not as

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Year in Review, 2018: Readers’ Suggestions?

29 days ago

Last year’s review was subtitled “Fighting against the Normalization of Lying”, with entries on Stephen Moore’s estrangement from the truth, Ironman’s misunderstanding of consumer surplus, and Donald Trump’s confusion over debt vs deficits, among others.
Put in suggestions for this year (preferably from the Econbrowser archives or comments); some candidates: the oil embargo of 1967 , recession in California , the miracle of Wisconsin’s manufacturing revival since the tax credit (hint: there is no miracle) , or how we won the trade war with China before the leaves fell .

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