Thursday , February 21 2019
Home / Menzie Chinn (page 10)
Menzie Chinn

Menzie Chinn

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

Articles by Menzie Chinn

A Primer on Exchange Rate Misalignment (Updated)

2 days ago

As the administration pushes for “stability” in the Chinese exchange rate while imposing tariffs on China, it might be useful to recount the various ways in which different observers define currency “misalignment”. Here I update a primer first posted in 2010.

Currency misalignment can be determined on the basis of the following criteria or models:
Relative purchasing power parity (PPP)Absolute purchasing power parityThe “Penn Effect”The behavioral equilibrium exchange rate (BEER) approachThe macroeconomic balance effectThe basic flows approachAn equilibrium approachI have discussed several of these approaches in the past [0] [1], but a review of the approaches bear repeating, if only because there so much confusion regarding what constitutes currency misalignment.
Relative PPP
Relative

Read More »

Crazy Definitions of Equilibrium Exchange Rates

5 days ago

“The Coalition for a Prosperous America” releases what it burbles as a “Groundbreaking CPA Study…” entitled “Quantifying Economic Growth and Job Creation from a Competitive Dollar”. Don’t be fooled by all the footnotes and the numbers. At the basis of the analysis is the aphorism: “Neither a borrower nor a lender be”.

Here’s how the email from CPA described the study:
A new study of the US economy fromthe Coalition for a Prosperous America (CPA) economics team shows that the US dollar is overvalued by 27 percent. Adjusting the dollar to a competitive level would yield large benefits to the economy, including an estimated $1 trillion in additional GDP and up to an additional 6.7 million new jobs over six years.
Here’s the basic picture we’re working with:
Figure 1: Real value of US dollar

Read More »

Industrial and Manufacturing Production Decline: Whence the Business Cycle?

6 days ago

Interesting news even as we are flying partly blind (some government series are still lagging).

Here’re industrial and manufacturing indices, normalized to 2009M06=0 (recession trough).
Figure 1: Industrial production (blue) and manufacturing production (red), both in logs normalized to 2009M06=0 (NBER defined trough). Orange denotes Trump administration. Source: Federal Reserve Board via FRED, and author’s calculations.The 0.9% and 0.6% declines in m/m manufacturing and industrial output compare to 0.55% and 0.5% standard deviations over the 2009M06-2013M01 period. The manufacturing decline is therefore statistically significant. Last month’s numbers were also revised down. As noted in Reuters, automobile production seems to be driving this latest movement.
This data follows the retail

Read More »

Why Isn’t Stephen Moore Still Bragging about Coal As #1?

7 days ago

Recall from July 2017, when Stephen Moore wrote an article entitled “When It Comes To Electric Power, Coal Is No. 1” ?

No more. Now, lying has never been an impediment to Mr. Moore claiming something that was untrue (see [1] [2] [3] [4] [5] [6] [7] ) — but in this case perhaps it’s just so clearly untrue, he was chastened:
Figure 1: Share of all fuels net power generation accounted for by coal (red) and natural gas (blue). Orange shading denotes Trump administration. Source: EIA and author’s calculations.So much for “winning” (coal edition). Not that I’m complaining.
Addendum, 2/15 9am Pacific
Figure 2:  Net power generation accounted for by coal (red) and natural gas (blue). Orange shading denotes Trump administration. Source: EIA

Read More »

The Mystery of the Miniscule Term Spread

7 days ago

The Federal budget has just had a big hole blown in it, thanks to the Tax Cuts and Jobs Act and the last omnibus spending bill, the both the Fed and foreigners (including central banks) are no longer adding to their holdings of Treasurys.

First, consider that when structural (cyclically adjusted) budget deficits rise, often spreads rise. But not this time around.
Figure 1: 10 year-3 month Treasury spread (blue), structural budget deficit as a share of potential GDP (red). Orange shading denotes Trump administration. Source: Federal Reserve, CBO, Budget and Economic Outlook, and author’s calculations.Not only is emission of government bonds rising, demand for government bonds is apparently tailing off.
Figure 2: Foreign and international holdings of US Treasurys (blue) and Federal Reserve

Read More »

Scott Walker Lies (Yet Again)

10 days ago

About taxes and revenues and growth. He just can’t stop lying.

From twitter:
“During the 3 times the top marginal tax rates were lowered in the 20th century (Harding/Coolidge, JFK/LBJ & Reagan) revenues actually went up while the economy improved in America.”
You can look to the following two graphs to assess the veracity of his account of the JFK and Reagan episodes.
Figure 1: Maximum marginal tax rate (blue, left scale), and personal income tax revenue as a share of GDP (red, right scale). Source: Tax Policy Center, BEA, author’s calculations.Figure 2: Maximum marginal tax rate (blue, left scale), and year on year growth rate of of real GDP (red, right scale). Source: Tax Policy Center, BEA, author’s calculations. As for the first episode, see Goolsbee (BPEA, 1999).
What inspired

Read More »

Random Sunday Observation on the Compositional Attributes of the Econoblogosphere

11 days ago

The economics blogosphere, as listed in several lists of “top blogs” is remarkably monochromatic, and male.

If one types in the words “top economics blogs” into Google, one gets several lists:
Intelligent Economist, 2018FocusEconomics, 2018American Library AssnI would’ve liked to do a tabulation and present a formal breakdown. However, the day job prevents me from devoting too much time; nonetheless, a cursory examination/count yields the following (unsurprising) insights: (1) minorities are under-represented in the typical list, and (2) females are under-represented — in both cases relative to the general population. I suspect also relative to the population of economists (defined as those who have an economics/public policy degree, or publish on the subject). (A count is hard to do

Read More »

Scott Walker Tweets on Job Creation

12 days ago

From twitter:

The U.S. economy added 304,000 new jobs in January. @POTUS @realDonaldTrump should highlight this positive economic news in his @SOTU address. More jobs, low unemployment.
This reminds me that only as of November 2018 did Wisconsin meet and continuously exceed the goal of 250,000 new jobs that former Governor Scott Walker promised for January 2015.
And as for that celebrated competition between Governors Dayton and Walker, well we know who won.
Figure 1: Private nonfarm payroll employment in Minnesota (blue), in Wisconsin (red), both in logs, normalized to 2011M01=0. Green denotes yet to be benchmarked data. Source: BLS, author’s calculations.

Read More »

What a Confidence Interval Is Not

12 days ago

Ever since I read the hysterically incorrect interpretation of a confidence interval from a person who purports to be a policy analyst, I’ve been looking for a succint explanation from a statistician, as a handy reference. Here it is (h/t David Giles via Mark Thoma):

The specific 95 % confidence interval presented by a study has a 95 % chance of containing the true effect size. No! A reported confidence interval is a range between two numbers. The frequency with which an observed interval (e.g., 0.72–2.88) contains the true effect is either 100 % if the true effect is within the interval or 0 % if not; the 95 % refers only to how often 95 % confidence intervals computed from very many studies would contain the true size if all the assumptions used to compute the intervals were correct. It is

Read More »

“Go back to Puerto Rico”

14 days ago

“Republican Rep. Jason Smith yelled a potentially racially charged remark across the aisle as Democratic Rep. Tony Cárdenas was at the podium.” (Roll Call)

This behavior provides an insight into the sheer callousness of some people.
Nonetheless, this provides a good example to remember what has happened in Puerto Rico, as they now face an impending food crisis, as funding for food assistance runs out. Should that happen, we will need to start calculations of excess fatalities, based on Mr. Trump’s niggardliness and racism.
For now, a recap of excess casualties including the official estimates, and those I calculated.
Figure 1: Cumulative excess deaths from September 2017, for simple time dummies OLS model (blue), OLS model adjusting for population (green), and Quantile Regression model

Read More »

This Is Winning?

14 days ago

The November trade release on US-China trade:

Figure 1: US merchandise exports to China (blue), and seasonally adjusted using X-13 with lunar new year dummy (bold dark blue), and US merchandise imports from China (red), and seasonally adjusted (bold dark red), both in billions US$, at annual rates. NBER defined recession dates shaded gray. Trump administration shaded light orange. Source: BEA/BuCensus, NBER, and author’s calculations. Of course, as Brad Setser points out, Chinese imports from the rest of the world overall have also decreased, so the decrease in US exports to China cannot be completely ascribed to tariffs and counter-tariffs.
However, to the extent that the Chinese slowdown is partly attributable to the US trade sanctions, even part of the income-driven decline in US

Read More »

Guest Contribution: “Can Specialization Patterns and Trade Costs Account for External Balances?”

15 days ago

Today, we are pleased to present a guest contribution written by Emine Boz (IMF), Nan Li (IMF) and Hongrui Zhang (IDB). The views expressed herein are those of the authors and should not be attributed to the IMF, IDB, their Executive Boards, or the managements of those organizations.

Some major economies specializing in sectors that face relatively high trade costs, such as services, tend to run current account deficits, whereas countries specializing in more easily tradable sectors, such as manufacturing, often run surpluses. This column tests this casual observation using a dataset comprehensive across time and countries, and finds a negative impact of effective exporting costs on the current account, but the average effect is quantitatively limited. It thus follows that the

Read More »

“International spillovers of monetary policy through global banks”

16 days ago

That’s the title of a special issue of the Journal of International Money and Finance that’s just been published.

Source: Buch et al. (2018).From the introductory editorial:
“…most of the literature [on spillovers] has focused on macroeconomic channels, whereas comparatively less attention has been paid to transmission via banks, which may vary depending on individual banks’ characteristics and the features of national banking systems.Against this background, the International Banking Research Network (IBRN) launched a project aimed at closing some of these gaps, drawing on a unique network of researchers and data. Country teams compiled individual bank-level data for the period from 2000 through 2015, usually based on confidential data proprietary to central banks, and then analyzed

Read More »

The Modified Yield Curve and Growth Prospects through 2019

17 days ago

It’s kind of limiting to look only at recessions as predicted by the yield curve. What about growth?

I run regressions of 4 quarter GDP growth (in log terms) as a function of one year lagged 10 year-3 month Treasury spread, the spread augmented by one year lagged economic policy uncertainty (EPU, from Baker, Bloom and Davis), and spread augmented by EPU and contemporaneous four quarter growth in potential GDP.
Figure 1: 4 quarter growth rate in real GDP (dark blue), predicted from 10 year-3 month Treasury spread lagged one year (teal), from spread augmented by EPU lagged one year (red), and lagged spread and EPU augmented with contemporaneous 4 quarter growth rate in real potential GDP (chartreuse). NBER defined recession dates shaded gray. Light orange denotes Trump administration.

Read More »

Lest You Be Lulled by the NFP Release: Employment Growth 1 yr before Recessions

20 days ago

Figure 1: M/m annualized growth rate in nonfarm payroll employment in the runup to 2007-09 recession (red), to 2001 recession (teal), and assumed 2020 recession starting in January (dark blue). NBER defined recession dates shaded gray, starting at peak. Source: BLS via FRED, ALFRED, and author’s calculation.Update, 5:30pm Pacific:
Forward looking indicators continue to suggest a slowdown.
Figure 1: US economic policy uncertainty (EPU) index, 7 day centered moving average (gray, left scale), 10 year-3 month Treasury spread (blue, right scale), and 10 year-2 year Treasury spread (red, right scale), both in percentage points. Light orange shading denotes Trump administration, orange denotes Federal government closures. Source: policyuncertainty.com, and Federal Reserve Board via FRED, and

Read More »

Guest Contribution: “The ECB has reached its political limits. Its consequences in eight charts”

20 days ago

Today, we are fortunate to present a guest contribution written by Ashoka Mody, Charles and Marie Visiting Professor in International Economic Policy, Woodrow Wilson School, Princeton University. Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments.

Hélène
Rey, a professor at London Business School, argues that the U.S. Federal
Reserve determines
global monetary policy. The Fed determines the interest rate for the
use of the world’s most dominant currency, the U.S. dollar. Fed policy decisions,
therefore, trigger the “global financial cycle,” which causes global capital to
slosh around the world, placing severe constraints on national monetary
policies.
Some,
however, insist that all central banks are equally effective (or

Read More »

Is California in Recession? (Part XIV)

21 days ago

December 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 December employment figures are discussed here). It’s (still) unlikely that a recession occurred in 2017. However, growth has decelerated at the end of 2018.

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

Read More »

The Wisconsin Short Term Economic Outlook

21 days ago

Short term growth prospects are “baked in”, from the Walker/Vos/Fitzgeral regime. Interestingly, we have mixed signals from economic indicators (and no signal from some that are delayed — thanks, Trump!).

Figure 1: Civilian employment, Dec. 2018 release (dark red), and Dec. 2017 release (red), and nonfarm payroll employment, Dec. 2018 release (dark blue), and Dec. 2017 release (blue),all in thousands, seasonally adjusted. Light green denotes yet to be benchmarked data. Source: BLS, ALFRED.Note that the household survey based series, civilian employment, exhibits substantial benchmark revisions. But even the establishment series was noticeably revised downward. This provides hope the economy is still expanding. The Philadelphia Fed’s coincident index is still rising (as of December), but

Read More »

Scott Walker Is a Rube

22 days ago

From NYT, “Foxconn Is Reconsidering Plan for Wisconsin Factory“:
Foxconn, the giant Taiwan-based company that announced plans for a $10 billion display-making factory in Wisconsin, now says it is rethinking the project’s focus because of “new realities” in the global marketplace.

Photograph: Evan Vucci/AP Clearly, neither the explicit subsidies and tax expenditures, nor the relaxations of environmental regulations, were sufficiently large to ensure the Foxconn investment.
Discussion in my 2017 post. See a broader recap of such incentives in a guest contribution by Professor Ann Markusen.
A CROWE economic analysis contingent on implementation as planned, here.
It is possible that Foxconn will reverse its recent decision, and move back to planning for a massive production facility.

Read More »

Guest Contribution: “Liquidity and Exchange Rates: An Empirical Investigation”

22 days ago

Today, we are pleased to present a guest post written by Charles Engel, Professor of Economics at the University of Wisconsin, Madison.

The academic economics literature on foreign exchange rate determination has not had much success linking exchange-rate movements to standard macroeconomic variables. This problem has come to be known as the “exchange-rate disconnect” puzzle, as coined by Obstfeld and Rogoff (2000). The problem is that, when examining the so-called G10 currencies (the U.S. dollar, the euro, the Japanese yen, the British pound, the Canadian dollar, the Swiss franc, the Australian dollar, the New Zealand dollar, the Swedish krona, and the Norwegian krone), standard macroeconomic explanatory variables such as interest rates, GDP, and inflation have very little power to

Read More »

Guest Contribution: “On Known Unknowns and Unknowns Unknowns: Managing Risk in Emerging Markets”

23 days ago

Today we are pleased to present a guest contribution written by Carlos Vegh (Chief Economist), Guillermo Vuletin, Daniel Riera-Crichton (economists), Juan Pablo Medina (consultant), Diego Friedheim, Luis Morano, and Lucila Venturi, in the World Bank’s Latin America and the Caribbean unit. The views expressed herein are those of the author and should not be attributed to the World Bank, its Executive Board, or its management.

In light of recent political and institutional uncertainty worldwide, lower commodity prices, growing cost of foreign debt, slowing external demand from major trading partners, and an increase in the frequency and intensity of natural disasters due to climate change, the perception of risk in emerging markets is as high as ever and calls for comprehensive risk

Read More »

CNN: Fire this Buffoon

24 days ago

I’m talking Stephen Moore. From CNN Business (1/24):

… the December Consumer Price Index number released earlier this month showed that prices declined by 0.1% over the previous month. Granted, it was a small decline over a period of just one month, but when prices fall, that’s called deflation.
Moore has used judicious rounding. The exact calculation based on the level of the index itself, the month-on-month (m/m) decline is 0.06%, and on an annualized basis 0.7%. More to the point, the 0.06% decline should be placed in the context of the variability of the CPI, which on a m/m basis is 0.26 percentage points (standard deviation, over the Great Moderation period, 1986-2018). In other words, this is nowhere near a statistically significant decline.
Hence BLS notes report:
Users should

Read More »

Guest Contribution: “Successes and failures of the euro’s first 20 years”

24 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. A shorter version appeared in Project Syndicate on January 26th.

In Europe, twenty years ago this month, 11 long-standing
national currencies disappeared and were replaced by the new single currency,
the euro.  Since then, the euro has had
its successes and failures.
Let us review the experience of the
euro’s first two decades.  Where there
were failures, to what extent were they the result of avoidable technical
mistakes?  Of warnings not heeded?  Or were they the inevitable result of a
determination to go ahead with monetary union in the absence of a political
willingness to support fundamental

Read More »

Diverting Recovery Funds from Puerto Rico to Finance “the Wall”

25 days ago

In the likely event that Mexico does not provide the funds to build “a beautiful big wall” on our southern border, will Mr. Trump declare a national emergency and redirect funds? Mr. Trump has mentioned diverting monies from Puerto Rico recovery.

Numbers, from CNN:
There is more than $13 billion not yet physically spent on the infrastructure repair projects, but that have been promised to these communities.For instance, more than $2 billion planned for projects in Puerto Rico has not yet been spent. More than $4.5 billion for projects in Texas, including those related to 2017’s Hurricane Harvey, has also not been spent.
Note that estimates for the total cost of building the wall range from $12-$40 billion. Hence, it is unlikely that redirecting these funds would be sufficient to

Read More »

Guest Contribution: “Economic Policy Uncertainty and Recession Probability”

27 days ago

Today, we are fortunate to present a guest contribution written by Paweł Skrzypczyński, economist at the National Bank of Poland. The views expressed herein are those of the author and should not be attributed to the National Bank of Poland.

Is it worth to use the U.S.
Economic Policy Uncertainty Index (EPUI) as measured by Baker et al. (2016) together
with the yield curve slope to track the business cycle turning points?
One can check how the EPUI performs when added to a standard term spread model specification to answer the above stated question. Monthly news-based EPUI time series goes back to 1985, however it is possible to construct a much longer time series of the EPUI with the use of historical data published at http://www.policyuncertainty.com. That is exactly what we perform

Read More »

Guest Contribution: “On the euro’s 20th birthday, Draghi’s tribute perpetuates long-refuted myths”

28 days ago

Today, we are fortunate to present a guest contribution written by Ashoka Mody, Charles and Marie Visiting Professor in International Economic Policy, Woodrow Wilson School, Princeton University. Previously, he was Deputy Director in the International Monetary Fund’s Research and European Departments.

The recent celebratory comments on the euro’s 20th anniversary mainly used high-minded but meaningless words. European Commission vice president Valdis Dombrovskis, for example, tweeted, “Being part of the Euro means being part of a common journey. … European nations will be stronger if they travel together.” European Central Bank president Mario Draghi attempted a more considered, but nevertheless cheery, economic scorecard. To convey cheer, he repeated worn storylines and disregarded

Read More »

Term Spreads and Policy Uncertainty in Perspective

29 days ago

The combination of yield curve inversion and high uncertainty is the exception, rather than the rule.

Figure 1: Economic Policy Uncertainty index (Baker Bloom and Davis) (gray, left scale), and 10yr-3mo spread (blue, right scale), and 10yr-2yr spread (red, right scale), in %. January 2019 observation are daily observations through 1/23. NBER defined recession dates shaded gray. Orange denotes Trump administration. Source: policyuncertainty.com, Fed, NBER.Something to remember when considering this post: the effects might not be additive.

Read More »

So Tired of Winning: US-China Trade Edition

January 22, 2019

Classes are about to start, so time to assemble slides on the trade outlook. I put together this graph of US goods exports to and imports from China (would’ve been through November, but for the Federal government shutdown – Jan 8 was release date). Please help me see the victory Mr. Trump keeps on talking about.

Figure 1: US merchandise exports to China (blue), and seasonally adjusted using X-13 with lunar new year dummy (bold dark blue), and US merchandise imports from China (red), and seasonally adjusted (bold dark red), both in billions US$, at annual rates. NBER defined recession dates shaded gray. Trump administration shaded light orange. Source: BEA/BuCensus, NBER, and author’s calculations.Conducting seasonal adjustment with discrete structural breaks is a hazardous enterprise, so

Read More »

Guest Contribution: “All you need to know about the drivers of capital flows”

January 22, 2019

Today we are pleased to present a guest contribution written by Swarnali Ahmed Hannan, economist at the IMF. The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.

In a recent IMF working paper entitled “Revisiting Determinants of Capital Flows to Emerging Markets—A Survey of the Evolving Literature”, I recount a roller coaster ride into the history of the determinants of capital flows to Emerging and Developing Market Economies (EMDEs).
Although the capital flow landscape has changed immensely over the past four decades in terms of both magnitude (Figure1) and composition (Figure 2), the million-dollar question has remained the same: are flows to EMDEs driven by push or pull factors? The former represents

Read More »