Friday , September 20 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

Ken Rogoff: “Is this the beginning of the end of central bank independence?”

2 days ago

Why you should attend this UW Economics JPGI talk by Kenneth Rogoff tomorrow (Wednesday) at 4:30 pm:

…The United States, because of the Federal Reserve, is paying a MUCH higher Interest Rate than other competing countries. They can’t believe how lucky they are that Jay Powell & the Fed don’t have a clue. And now, on top of it all, the Oil hit. Big Interest Rate Drop, Stimulus!
— Donald J. Trump (@realDonaldTrump) September 16, 2019

’nuff said!

Register here. Paper here.

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Guest Contribution: “Identifying the German business cycle”

3 days ago

Today, we are pleased to present a guest contribution written by Laurent Ferrara (Professor of International Economics, SKEMA Business School, Paris), and Director, International Institute of Forecasting.

For few months, a recurrent economic issue is the possible U.S. economic recession in 2020 (see discussions on Econbrowser here and here). But there are also some similar questions in the euro area about potentially upcoming recessions, especially in Germany, an open economy that heavily depends on the global business cycle.  In this post, I propose to assess the German business cycle based on standard tools often used in the business cycle literature.
Predicting recessions is one of the biggest challenge for economists and even trying to identify recessions in real-time is not an easy

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Some Observations on Determining Business Cycle Chronologies

4 days ago

Two consecutive quarters of negative GDP growth is a commonplace rule of thumb for defining recessions, but the original conception of recessions is not captured by this simple definition. As some people have disagreed with my description (see [1]), it might be useful to review how recessions are defined in the US (with associated drawbacks), and in other economies.

The Origins of the NBER Business Cycle Chronology
The NBER business cycle chronology is typically characterized as quasi-official. The US government does not, through its statistical agencies, make pronouncments on recessions or expansions. The closest I’m aware of is then CEA Chair Greg Mankiw’s critique of the NBER’s dating of the 2001 recession to 2001, instead of 2000.
First, what’s the NBER’s original conception? Here’s

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“The Economic Effects of Trade Policy Uncertainty”

6 days ago

That’s the title of a new paper by Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo:


We study the effects of unexpected changes in trade policy uncertainty (TPU) on the U.S. economy. We construct three measures of TPU based on newspaper coverage, firms’ earnings conference calls, and aggregate data on tariff rates. We document that increases in TPU reduce investment and activity using both firm-level and aggregate macroeconomic data. We interpret the empirical results through the lens of a two-country general equilibrium model with nominal rigidities and firms’ export participation decisions. In the model as in the data, news and increased uncertainty about higher future tariffs reduce investment and activity.

And here’s one set of

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Additional Graphs for Econ 435 Lecture

10 days ago

In anticipation of Jim Hamilton‘s talk this Wednesday,  I’m going to talk a little about recessions in today’s lecture. Here are some data to keep in mind:

Growth appears to be decelerating, including nowcasts:

But the most recently released data for some key variables do not yet signal a recession:

Except for some transportation indicators, like the number of freight shipments.

In the graph above, I also show a probability of being in a recession given freight traffic (using a probit model).
Forward looking indicators that have historically predicted a recession have been flashing red for months. The question is whether “this time is different”.

Just to be clear, a recession is not a 2 consecutive quarter decline in real GDP; that is a rule of thumb. Here is the NBER’s definition:

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Freight Shipping Growth and Recession Probability

11 days ago

Prob(recessiont) = -1.925 – 16.10 freightgrowtht + ut
McFadden R2 = 0.51 NObs = 235 (2000M01-2019M07). Coefficients significant at 5% msl bold.

Figure 1: Year-on-year growth in Cass Freight Index, in % (blue, left scale), recession probability from probit regression, in % (red, right scale). NBER recession dates shaded gray. Source: Cass Information Systems, Inc. via FRED, NBER and author’s calculations.
As Cass Information Systems, Inc. note themselves in their July report:
With the -5.9% drop in July, following the -5.3% drop in June, and the -6.0%
drop in May, we repeat our message from last two months: the shipments
index has gone from “warning of a potential slowdown” to “signaling an
economic contraction.”

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Five Observations on the Employment Release

12 days ago

1.  The deceleration in employment growth is noticeable; 2. Taken with the preliminary benchmark revision, it’s possible employment growth deceleration is even more marked; 3. With accounting for temporary census workers, m/m growth is fairly anemic; 4. Nonetheless, latest vintages of key indicators suggest only a slowdown; 5. Manufacturing employment and hours (as well as production) still below peak.

Figure 1: Nonfarm payroll employment, latest vintage (dark blue), 2014-2016 stochastic trend (red), and March preliminary benchmark revision (blue triangle), all on log scale. Light green denotes Trump administration. Source: BLS and author’s calculations.

Figure 2: Month-on-month annualized growth in nonfarm payroll employment, latest vintage (dark blue), in July release (green), and in

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The Politics and Policy of China

13 days ago

A Tenure-track Position at UW Madison

“The University of Wisconsin-Madison seeks to hire a faculty member with research and teaching interests in comparative politics or international relations, with a primary focus on China and a secondary focus on East Asia and the Pacific Rim. Potential areas of substantive expertise in the politics and policy of China include: political and economic development, human rights, environmental politics and policy, international political economy, international security, international organizations/governance, non-governmental organizations, or political sociology.
This faculty position is part of a three-position research cluster, Rethinking East Asia and the World, which was proposed by the Title VI-funded National Resource Center, the Center for East

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Guest Contribution: “A disaster under-(re)insurance puzzle: Home bias in disaster risk-bearing”

14 days ago

Today, we are pleased to present a guest contribution written Hiro Ito (Portland State University) and Robert N. McCauley (formerly Bank for International Settlements). The views presented represent those of the authors, and not necessarily those of the institutions the authors are affilliated with.

One basic role of international financial markets is to share risks across economies. For instance, investors swap the equity of firms at home for those abroad in order to diversify away from sources of loss that are unique to the domestic economy. In an ideal world of complete risk-sharing, domestic investors would bear such a loss only to the extent of their share of world wealth (“CAPM”).
Thus, a small economy would lay off on the rest of the world almost all risk that is unique to it.

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Estimated Probability of Recession in August 2020 = 49%

17 days ago

…using plain vanilla 10yr-3mo probit regression, over 1986M01-2019M08 period, using data shown below in Figure 1

Figure 1: Treasury 10yr-3mo spread (blue) in %. NBER defined recession dates shaded gray. Source: Federal Reserve via FRED, Treasury, NBER, and author’s calculations.
As noted in this post, based on the first half of August, the probability of recession in August 2020 was 47%. Using the entire August data, I obtain the following regression estimates:
Prob(recessiont+12) = -0.329 – 0.869 spreadt + ut+12
McFadden R2 = 0.29, NObs = 392. Coefficients significant at 5% msl bold. The spread is in percentage points.
Here are the predicted probabilities:

Figure 2: 12 month ahead probability from probit regression on 10yr-3mo spread, (teal). NBER defined recession dates shaded gray.

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Wisconsin Civilian Labor Force Growth during the “Open for Business” Era

17 days ago

Remember February 2011, when Governor Walker declared this?

Source: Capital Times

So, since Walker failed to hit his 250K new private sector jobs by January 2011 (it finally did so in December 2018), and FoxConn has so far been an enigma, we can look at how Wisconsin did in boosting the labor force — presumably pretty simple given the mobility of labor across borders.
Well, not so good.

Figure 1: Log civilian labor force for Minnesota (blue), for Wisconsin (brown), and US (black). Non-Walker period shaded gray.Source: BLS via FRED, and author’s calculations. 
These labor force trends are important to remember when people hype the decline in the Wisconsin unemployment rate, and argue that it only stopped because Wisconsin unemployment pool had shrunk to such low levels. The Wisconsin

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Guest Contribution: “Oil Prices and the U.S. Economy: Evidence from the Stock Market”

18 days ago

Today, we’re fortunate to have Willem Thorbecke, Senior Fellow at Japan’s Research Institute of Economy, Trade and Industry (RIETI) as a guest contributor. The views expressed represent those of the author himself, and do not necessarily represent those of RIETI, or any other institutions the author is affiliated with.

Last year Donald Trump tweeted “Oil prices are too high, OPEC is at it again. Not good!”   President Trump’s tweet reflects the conventional wisdom that higher oil prices reduce growth and lower stock prices in oil-importing nations like the U.S.  The IMF (2014) similarly forecasted that a 20 percent increase in oil prices would raise inflation in advanced oil-importing countries by between 0.5 and 0.8 percentage points, lower GDP by between 0.4 and 1.9 percent, and

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Prebuttal: Fiscal Policy Can Be Effective

19 days ago

In my mind, absent a shooting war, the economy is headed for a slowdown, if not a recession. I am confident that, should the administration or anybody else propose countercyclical fiscal policy, a set of the usual suspects will deny the efficacy of discretionary policy. Hence,  a prebuttal is called for.

A Typical Skeptic’s View
Here’s a quote from an article the last time the fiscal debate raged, in 2010. From Brian Riedl’s The fatal flaw of Keynesian stimulus (Washington Times):
Last week, the Congressional Budget Office released a report claiming that the $814 billion “stimulus” has added 3.4 million net jobs.

Such implausible analysis does not come from actually observing the post-stimulus economy. Rather, it comes from Keynesian economic models that have been programmed to

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Winning! August Soybean Edition

24 days ago

From Bloomberg today:
As confusion about the possibility of a trade deal between Washington and Beijing reigns, Chinese soybean buyers are taking no chances and are turning to U.S. rivals in South America to secure supplies for next year.
Graph of Brazil premium speaks volumes:

So despite Trump’s assertion the Chinese “want deal”, what some people characterize as a price “blip” continues.

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RV Sales and Recession in 2020?

24 days ago

In an earlier post from last December, I noted the correlation between growth in RV sales and recession. Extrapolating October YTD data for 2018 as a whole, I obtained 11% probability of recession. Extrapolating June YTD data for 2019 (thanks to reader AS for compiling the time series data), I obtain 70% probability of recession for 2020.

Here’s the time series:

Figure 1: Growth rate of Recreational Vehicle sales, in log first differences (blue). NBER defined recession dates shaded gray. 2019 observation extrapolated based on first six months’ data. Source:, NBER, and author’s calculations.
I estimate a probit regression over 1983-2019 period:
Pr(recessiont) =  -1.09 – 5.36(salesgrowtht-1) + ut
McFadden R2 = 0.26, NObs = 37. Bold denotes significant at 5% significance level.

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An Ad Hoc Term Premium Adjusted Term Spread Recession Model

25 days ago

One criticism of the use of the term spread model to forecast recession in current times is that this time is different. [1] [2] [3] In particular, due to quantitative easing, the term premium is lower than in past episodes. Hence, in this interpretation, an inverted yield curve no longer signals as much future depressed interest rates as in the past.

To see this, consider this decomposition. The long yield is the sum of two components: (i) EHTS, expectations hypothesis of the term structure, and (ii) tp, the term premium (Benzoni et al. (2018) further decompose the term premium.) The first component is the relevant one for predicting the business cycle. A long rate is the average of the expected short rates, so a EHTS component lower than the current short rate means expected rates are

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Intraday PredictIt Probability of Recession Hits 46%

26 days ago

Hit that value earlier today, before dropping to 42% (recession in Trump’s first term, that is)

Source: PredictIt, accessed 8/24/2019 2pm Pacific.

Source: PredictIt, accessed 8/24/2019 2:15pm Pacific.
My estimates of recession probability, using plain vanilla term spread model, and augmented with a credit spread, estimated over the 1986-2019M08 period (assuming the rest of August is like what transpired through August 23):

Figure 1: 12 month ahead probability from probit regression on 10yr-3mo spread, (blue), and same augmented with BAA-Treasury 10yr spread. NBER defined recession dates shaded gray. Forecast period shaded light green. Source. NBER and author’s calculations.

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Market Assessment of Prospects for Resolution of the US-China Trade Dispute by September 2020

26 days ago

Going from August 22rd to 23rd,  front month futures dropped 12-6; the August 2020 futures price (which are an unbiased predictor of one year ahead spot prices) was down 8-4. Hence, farmers should prepare for a long, tough, period of self-inflicted (by the administration) damage.

Source:, accessed 8/24/2019.
Given no real market moving agricultural news — aside from Mr. Trumps tweets tit-for-tat response to the Chinese tariff retaliation — we can ascribe about 2/3 of the current drop to long term impact on US soybean prices.
In other words, the market sees little prospect for a swift and positive resolution to the current US-China trade dispute.
The blip continues!

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Prediction Markets on Recession by January 2021

28 days ago

PredictIt, accessed 4pm Pacific today:

Why the recent movement? One piece of information, the Manufacturing PMI:

Below 50 indicates contraction.
In addition, despite the assurances of the administration, markets do not seem to believe in an incipient turnaround:

Figure 1: 10 year-3 month Treasury spread, (blue), 10 year-2 year (red) and 5 year-3 month (green), all in %. Federal Reserve via FRED, Treasury, author’s calculations.
All this against a backdrop of elevated (to say the least) policy uncertainty.

Figure 2: Economic Policy Uncertainty index (blue). Source: accessed 8/22/2019.
Note that big data in the form of Google Trends suggests heightened interest in the possibility of recession.

Figure 3: Google Trends: search word

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Who’s Forecasting a (Technical*) Recession?

28 days ago

I keep on hearing that economists are lousy at forecasting, citing the An, Jalles, and Loungani (2018) analysis. Recently, we heard Larry Kudlow claim that nobody was predicting a recession in December 2007, when he was dismissing the possibility. Without disputing the consensus is lousy at detecting turning points in real time, we can check if all economists are.

In particular, thanks to this thing called “the Internets”, we can verify. From the Wall Street Journal December 2007 survey (taken early that month), three economists (out of 52 respondents) predicted at least two quarters of negative growth (Richard Berner/David Greenlaw of Morgan Stanley, Ram Bhagavatula and Kathleen M. Camilli), and four others at least one quarter of negative growth (Paul Ashworth of Capital Economics,

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CES Preliminary Benchmark Revision: NFP

29 days ago

Down 501K in March.  Private NFP down 514K.

Figure 1: Nonfarm payroll employment, July 2019 release (blue), stochastic trend 2014-2016 (red), and March preliminary benchmark revision (August 21, 2019), all on log scale. Light green shading denotes Trump administration. Source: BLS via FRED, BLS, and author’s calculations.

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Back-of-the-Envelope Calculation of Trump Induced Dollar Appreciation

August 21, 2019

Figure 1: Log real value of US dollar against a broad basket of currencies (blue, left scale), and global Economic Policy Uncertainty (red, right scale). Light orange shading denotes post election, orange shading denotes Trump administration. Source: Federal Reserve Board,, and author’s calculations.
Suppose you thought a hybrid real interest differential/Taylor fundamentals model worked for explaining the real trade weighted dollar. One might estimate over the 2001Q3-2019Q1 period the following:

rt = –0.81 – 0.74(πUSt – πRoWt) + 1.09(yUSt – yRoWt) + 10.6(iUSt  –  iRoWt) + 0.20epuGlobalt + ut
Adj-R2 = 0.65, SER = 0.0506, NOBS = 71, DW = 0.44. Bold denotes significance at 5% msl, using HAC robust standard errors.
Where r is the log real trade weighted value of the

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If a Recession Occurs, Plenty of People Will Have Predicted It

August 20, 2019

NABE survey, WSJ survey, Bloomberg survey, PredictIt

Source: NABE, Economic Policy Survey,19 Aug 2019. Survey 14 July-1 August 2019.

Source:WSJ, August 2019 survey of economists.

Source: Bloomberg, 8 Aug 2019.

Source: PredictIt, 16 Aug 2019.
All of these polls were conducted before the stock market drop on 14 August; the PredictIt market price was obtained on 16 August, so incorporates the news regarding inversion of the 10yr-2yr.

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Recession Probability If the Rest of August Is Like the First Half

August 19, 2019

…using plain vanilla 10yr-3mo probit regression, over 1986M01-2019M08 period, using data shown below in Figure 1

Figure 1: Treasury 10yr-3mo spread (blue), and 10yr-2yr spread (red), both in %. August observation is average over 8/1-16. NBER defined recession dates shaded gray. Source: Federal Reserve via FRED, Treasury, NBER, and author’s calculations.
The critical assumption is that the 10yr-3mo Treasury spread over the rest of August is the same as the first half, and the spread does not move toward zero, nor continue to fall.
The regression estimates:
Prob(recessiont+12) = -0.329 – 0.869 spreadt + ut+12
McFadden R2 = 0.29, NObs = 392. Coefficients significant at 5% msl bold. The spread is in percentage points.
Here are the predicted probabilities:

Figure 2: 12 month ahead

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“The data are pretty clear that we are not in a recession”

August 18, 2019

Surprisingly, that’s not a quote from Larry Kudlow on today’s news shows. Rather that is then Council of Economic Advisers Chairman Ed Lazear on May 8, 2008. Just to remind people, that is 5 months after the recession start determined by NBER.
Compare and contrast (Bloomberg):
“I don’t see a recession at all,” Kudlow said on “Fox News Sunday.” He added that there were no plans for additional fresh measures to boost the economy, and that the Trump administration would stay the course on its current agenda.

“Consumers are working. At higher wages. They are spending at a rapid pace. They’re actually saving also while they’re spending — that’s an ideal situation,” he said on NBC’s “Meet the Press.”
What did Ed Lazear see as of May 8, 2008?

Figure 1: Nonfarm payroll employment (blue),

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Winning: Midwest Manufacturing Employment

August 17, 2019

Michigan, Pennsylvania and Wisconsin drop, as US manufacturing employment rises.

Figure 1: Manufacturing employment in US (blue), and aggregate of Michigan, Pennsylvania, and Wisconsin (red), both in logs, 2018M12=0. Source: BLS, author’s calculations.

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A History of Trade Policy Retaliation: Soybeans Edition

August 16, 2019

As the date of the resolution of the US-China trade dispute drifts further and further — perhaps past the 2020 elections according to Mr. Trump — it behooves us to look at what soybean futures contracts for September 2019 indicated as of Trump’s announcement of Section 301 action against China ($10.30 bushel on 3/22/2018) vs $8.67 today (Sept. 2019 is the front month future for soybeans now).

Source:, accessed 8/16/19 1:51pm Pacific.
While some forces have driven down prices relative to what they otherwise would have been — African Swine Fever — other factors have driven them up (bad harvests elsewhere). But certainly tariffs, and Chinese guidance to Chinese firms not to purchase American soybeans, have had an impact.
Interestingly, the Sept 2019 futures price has continued

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