Economics 442Macroeconomic Policy

Lecture 19/2/2020

Instructor: Prof. Menzie ChinnUW Madison

Fall 2020

Administrative Issues• Course website:

http://www.ssc.wisc.edu/~mchinn/web442_f20.htmland Canvas (BBCollaborate)

• OH: TBA• Textbook: Blanchard, Macroeconomics• Additional Readings: from IMF, CBO, web,

Econbrowser• NYT, FT, WSJ, Economist

Administrative Issues

• Grading: 30% PS, 40% 2×MT, 30% paper• Dates:

- MT on 10/18, 11/19- Paper due on Thursday, 12/10

• Make-ups: None. Points are re-allocated if you have a legitimate excuse. No late assignments accepted

Background• Course with policy orientation • Theoretical background consistent with

New Keynesian approach- sticky prices & information based frictions

in short run- Neoclassical (flex-price) in the long run

• Focus on interpretation of data, response to shocks

Background

• Senior economist, White House Council ofEconomic Advisers

• Covered open economy macro, tradebalance, foreign economies (China, Japan, euro area)

• Consultant to International Monetary Fund (IMF), Congressional Budget Office (CBO), Bank of France

Schedule and Readings

A Deep, Deep Recession22,000

20,000

18,000

16,000

14,000

12,00000 02 04 06 08 10 12 14 16 18 20 22

Administration(Feb)

CBO(Jul)

SPF(Aug)

GDPbn.Ch.12$SAAR

econbrowser.com

PotentialGDP

Administration(Feb)

CBO(Jul)

SPF(Aug)

GDPbn.Ch.12$SAAR

econbrowser.com

PotentialGDP

Also an Atypical Recession

-.12

-.10

-.08

-.06

-.04

-.02

.00

.02

.04

.06

50 55 60 65 70 75 80 85 90 95 00 05 10 15 20

Real GDPgrowth rate(not annualized)

CBOf'cast

Real GDPgrowth rate(not annualized)

CBOf'cast

Big Sectoral Shock to Services

-.20

-.16

-.12

-.08

-.04

.00

I II III IV I II III IV2019 2020

Goods producing

Private services

Employment, in logs, 2020M02=0

econbrowser.com

Goods producing

Private services

Employment, in logs, 2020M02=0

econbrowser.com

Big Sectoral Shock to Services

-25,000

-20,000

-15,000

-10,000

-5,000

0

5,000

I II III IV I II III IV2019 2020

Goods producing

Private servicesChange in employment, 000's, s.a.

econbrowser.com

Goods producing

Private servicesChange in employment, 000's, s.a.

econbrowser.com

A Stop & Go Recession?

155,000

150,000

145,000

140,000

135,000

130,000

20,000

2,000

200

20

2 III IV I II III IV

2019 2020

Nonfarm payrollemployment, 000's[left scale]

Monthly Covid-19fatalities[right scale]

Nonfarm payrollemployment, 000's[left scale]

Monthly Covid-19fatalities[right scale]

How Big Are Multipliers

9.52

9.56

9.60

9.64

9.68

9.72

2007 2008 2009 2010 2011 2012 2013

Actual

high multipliers

low multipliers \ \

Midpoint multipliers

Log GDPbn. Ch.09$,SAAR

www.econbrowser.com

PotentialGDP

Crowding Out?

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

-2

0

2

4

6

8

10

12

14

16

70 75 80 85 90 95 00 05 10 15 20

Debt to GDP share[left scale]

10 yrTreasury, %[right scale]

10 yrTIPS, %

Debt to GDP share[left scale]

10 yrTreasury, %[right scale]

10 yrTIPS, %

Monetary Policy & Taylor Rule

The Taylor Rule Falls Short

Unconventional Monetary Policy (I)(Credit Easing/Quantitative Easing)

Unconventional Monetary Policy (II)a.k.a Forward Guidance

b

The New Monetary Framework

21,00020,00019,00018,00017,000

16,000

15,000

14,000

13,000

12,00000 02 04 06 08 10 12 14 16 18 20

Potential GDP (CBO)

Summers-Delong

Surveyof Prof.F'casters

GDP, SAARbn. Ch.2012$

econbrowser.com

Potential GDP (CBO)

Summers-Delong

Surveyof Prof.F'casters

GDP, SAARbn. Ch.2012$

econbrowser.com

The Dollar’s Rise in Perspective

140

130

120

110

100

90

8075 80 85 90 95 00 05 10 15 20

Real value ofUS dollarReal value ofUS dollar

The Dollar and Net Exports

140

130

120

110

100

90

80

-.06

-.04

-.02

.00

.02

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Value of US dollar[left scale]

Net Exportsto GDP[right scale]

Net Exportsex-oil to GDP

Value of US dollar[left scale]

Net Exportsto GDP[right scale]

Net Exportsex-oil to GDP

Dollar As Safe-Haven102

100

98

96

94

92

90

88

86 0

40

80

120

160

200

240

280

I II III IV I II III IV I II III IV2007 2008 2009

Lehman

Real valueof US dollar[left scale]

Economic PolicyUncertainty index[right scale]

Lehman

Real valueof US dollar[left scale]

Economic PolicyUncertainty index[right scale]

Dollar As Safe-Haven

114113112

111

110

109

108

107

106

105 0

100

200

300

400

500

600

I II III IV I II III2019 2020

Trump onbleach

Real valueof US dollar[left scale]

Economic PolicyUncertainty index[right scale]

Trump onbleach

Real valueof US dollar[left scale]

Economic PolicyUncertainty index[right scale]

So Maybe Growing US Indebtedness Can Continue

-.6

-.5

-.4

-.3

-.2

-.1

.0

.1

.2

75 80 85 90 95 00 05 10 15 20

US Net InternationalInvestment Positionto GDP ratio

US Net InternationalInvestment Positionto GDP ratio

Is the Phillips Curve Dead?

-.16

-.12

-.08

-.04

.00

.04

.08

1990 1995 2000 2005 2010 2015 2020

Outputgap

Shortfall

PCE y/yinflation

Outputgap

Shortfall

PCE y/yinflation

Phillips Curve

Which Measure Is the Right One?

-.02

-.01

.00

.01

.02

.03

.04

.05

-.12 -.10 -.08 -.06 -.04 -.02 .00 .02 .04

LOG(GDP12/GDP12_POT_CBOJUL20)

LOG(

PCON

S/PC

ONS(

-4))

m = 0.10R2 = 0.03

LOG(GDP12/GDP12_POT_CBOJUL20)

LOG(

PCON

S/PC

ONS(

-4))

m = 0.10R2 = 0.03

-.02

-.01

.00

.01

.02

.03

.04

.05

-.14 -.12 -.10 -.08 -.06 -.04 -.02 .00 .02

LOG(GDP12)-LGDP12_DELONGSUMLO

G(PC

ONS/

PCON

S(-4

))

m = 0.21R2 = 0.20

LOG(GDP12)-LGDP12_DELONGSUMLO

G(PC

ONS/

PCON

S(-4

))

m = 0.21R2 = 0.20