Thursday, May 7, 2009

Assorted Musings

Here are some assorted musings piled into one post.
  1. Just when the IMF thought it was becoming relevant again, the Asian Development Bank Fund moves closer to establishing an Asian Monetary Fund.
  2. Ben Bernanke is feeling the heat. Congress is planning televised hearings on whether Bernanke and Paulson pressured Ken Lewis and Bank of America (BoA) to be quiet and complete its acquisition of Merrill Lynch after BoA found out there were more problems with the bank. The WSJ reports that the congressional "review of documents, notes from phone conversations involving Federal Reserve officials and other information suggest 'there's fire there.' "
  3. Wow. Ben Bernanke was interested in pushing the federal funds rate to 0% in 2003. One can only imagine how much more pronounced the housing bubble and subsequent financial collapse would have been had the policy rate hit 0%.
  4. I listened to Russ Robert interview Ed Leamer on EconTalk (while doing grades!). One interesting point that Leamer makes is that no matter what has hit the the U.S. economy it has always returned to its trend growth rate of just over 3% per annum. While this consistency is a remarkable, what I find even more amazing is that the level of the U.S. economy seems to follow a deterministic trend. One striking example of this can be seen by looking at the log level of the U.S. economy after the Great Depression. The U.S. economy is where it would have been--based on a linear trend--had there been no Great Depression! This can be seen in the figure below (click on it to enlarge):

In short, the eyeball test seems to indicate that over the long run the U.S. economy is trend stationary not difference stationary. (Menzie Chinn provides some formal evidence that my eyeball test is correct.) It is almost as if this trend is a constant of nature.


  1. I wouldn't say a constant of nature, but rather the result of population growth and the inertia of technological progress :)

    In any event, don't you find it a bit strange that the modern advocates of trend stationarity are those such as Krugman and DeLong, who one would think (given the New Classical/New Keynesian distinction on this topic) would normally fit in the opposite category. What's more, I find it a bit strange that they invoke trend-stationarity in regards to the stimulus package. If the real GDP is really trend stationary, why do we need stimulus? (I'm being only a bit facetious.)

  2. David, I see one of your local banks is doing its best to bolster GDP (see The wages and other factor payments for this bit of work will naturally count towards a higher GDP.
    Destroying things (preferably in other people's countries) is of course a time honored way for nations to get back on to the stationary trend.

  3. Josh:

    I think they would argue that it is precisely because the world is trend stationary aggregate demand (AD) management makes sense. All that is needed is some tweaking (in the present crisis major tweaking) to get the economy back to trend or potential output. They would also say that if the world were difference stationary, then it would be more difficult if not futile trying to do AD management since potential output would be a moving target.

  4. ECB:

    Thanks for the link--an interesting story. Maybe we should go ahead and start destroying autos to help Detroit too. Okay, not a fair comparison...