Christiano - Freedom, Consensus, And Equality in Collective Decision Making
The Great Recession: Earthquake for · PDF fileThe Great Recession: Earthquake for...
Transcript of The Great Recession: Earthquake for · PDF fileThe Great Recession: Earthquake for...
TheGreatRecession:EarthquakeforMacroeconomics
LawrenceJ.ChristianoFreie Universitat Berlin,May30,2016
Objective• DiscusstheGreatRecession,2007-?
• Whatcausedit,whatmadeitlastsolong?
• Whydidsofewpeople(includingmacroeconomists)predictit?
• WhatimpactisithavingonMacroeconomicsasadiscipline?
• Macroeconomics
• Thebranchofeconomicsconcernedwithunderstandingthebehavioroftheeconomyasawhole.
• Principlefocus:periodicupsanddownsinaggregateeconomicactivity.• Business cycles
GreatRecession• Big,bypostWorldWarIIstandards.
The 2007-2009 Recession in PerspectiveOutput Consumption Investment Employment Hours
Percentage change, peak to trough2007-2009 Recession (2007 Q4-2009 Q3) -7.2 -5.4 -33.5 -6.7 -8.7Average Post WWII Recessions -4.4 -2.1 -17.8 -3.8 -3.2US Great Depression (1929 to 1933) -36 -23 -69 -27Christiano-Motto-Rostagno (2003)
SmallerthanGreatDepression.
GreatRecession
• AlthoughtheNBERbusinesscyclecommitteedeclaredtherecessionoverinsummer2009,notclearthatitreallystoppedthen.
GDPperperson(adjustedforinflation)
MoreEvidencethatWe’renotReallyoutoftheWoodsYet:LaborMarket
SuddenplungeinGreatRecessionwithslowandincompleterecovery.
Feb.2016
Civiliannon-institutionalpopulation in2016:253million.
Whythe5percentagepoint(i.e.,12millionpeople)plungeinemployment?Whyonlya1.5percentagepointriserecently?
E
Jan.2013
Accelerationindeclineat‘end’ofGreatRecession
Demographics?
Labormarket…unemployment• Categories:
• Laborforce,L=E+U
• Employed,E.• Unemployed(lookingforwork,buthaven’tfoundjob),U.
• Unemploymentrate:u=U/L=1– E/L.
• ImeasureL,E,U relativetopopulation.
• E.g.,E is‘employmenttopopulationratio’.
Unemploymentrate:thistimeitwasdifferent
• Traditionally,theunemploymentrateisusedasameasureofthehealthofthelabormarket.
• Historically,whenu falls,it’sanindicatorthatmorepeoplearebeingputtowork,i.e.,E isincreasing.
u=1– E/L
Declineinu primarilyreflectedfallinL!
Unemploymentrate
• Recentdropinunemploymentnot primarilyanindicatorofimprovedfunctioninginthelabormarket.
• Anotherworrisomefeatureoflabormarket:unemploymentduration.
• AskeachpersoninU,‘howlonghaveyoubeenunemployed?’
• Computeaverageoverallanswerstothequestion:
Meandurationofunemployment.
Theamountoftimespentunemployedisgreater,byfar,thanithasbeenatanypointinthepast70years.
Questions• WhatwasthetriggerfortheGreatRecession?
• Whatmadeitlastsolong?
• Avarietyofhypotheseswereadvanced.
• Nowaconsensusseemstobetakingshape.
• Butfirst,
• discusssomeideasthatwereadvancedinitially,butseemlessappealingnow.
InitialResponses• Initially,therewasmuchpuzzlementoverwhatwashappening(moreonthislater).
• Acoupleofinitialanswers:
• Firmshavelotsofjobopenings,it’sjustthatworkersdon’thavetherightqualifications.Skillsmismatchhypothesis.
• Firmshesitatetohiremoreworkersbecausetheyareuncertainaboutfuturetaxesandregulations.Uncertaintyhypothesis.
PresidentofFederalReserveBankofMinneapolis,on‘MismatchHypothesis’(8/17/2010)
• “Firmshavejobs,butcan’tfindappropriateworkers.Theworkerswanttowork,butcan’tfindappropriatejobs.”
• “Whateverthesource[ofthismismatch]itishardtoseehowtheFedcandomuchtocurethisproblem.”
• “Mostoftheexistingunemploymentrepresentsmismatchthatisnotreadilyamenabletomonetarypolicy.”
Source:https://www.minneapolisfed.org/news-and-events/presidents-speeches/inside-the-fomc#_ftnref2
MismatchHypothesisDoesNotHoldupinData
• Majorproblemforthemismatchhypothesis:
• All typesofworkersarehavingdifficultyfindingwork:
• Unemploymentratejumpedforworkersofdifferentoccupationsandeducationlevels.
• Source:HeidiShierholz:http://www.epi.org/publication/shortage-skilled-workers/
Unemploymentratehigherforworkersatalleducationlevels.Nearlydoublesforhighereducationlevels.
MismatchHypothesisDoesNotHoldupinData
• Ifthereasonfirmsarenothiringisthattheycan’tfindtherightworkers,thentheworkerstheydo haveshouldbeworkingharder.
• But,hoursworkedisdownacrossalmostallindustries.
Averagingacrossallworkers,wealsoseenoevidenceofanincreaseinaverageweeklyhoursrelativetobeforethestartoftherecession.
MismatchHypothesisDoesNotHoldupinData
• Ifwhat’sholdingfirmsbackfromhiringistheinabilitytofindtherighttypeofworkers,thenthewageofsometypesofworkers(the‘righttypes’)shouldbeskyrocketing.
• But,wagesacrosslotsofoccupationsarerisingatprettymodestrates.
Amountbywhichtheaverageworker’soutputincreasedfrom2007to2012
Moreproblemswithmismatch
• Ifskillsrequiredforworkincreasedsubstantially,shouldseeitinthelaborproductivitydata.
• Thepeoplethatareworkingshouldbeespeciallyproductive.
• Don’tseethisinthedata.
OverallrecenttrendinlaborProductivitygrowthseemsdown.
JobOpeningsandLaborTurnoverSurvey
• MuchofthemotivationforskillsmismatchcamefromJOLTSdata.
• Mylate2012,vacancyratewasbacktowhereitwasbeforerecession,butunemploymentratewasstillhigh.
• Seemedlikethejobswerethere,it’sjustthattheAmericanworkerwasnolongerqualified.
• (Blamethevictim?)
September,2009
September,2012
JOLTSdatanotconvincing
• PeoplesoonrememberedthatobservedcounterclockwiserotationinBeveridgecurveisexactlywhattheorypredictsinamajorrecession.
• Doesnotimplyanymismatch.
• ObservationmadebyPissarides longago.
• Quantitativediscussion:Christiano-Eichenbaum-Trabandt,‘UnderstandingtheGreatRecession’
MismatchHypothesisDoesNotHoldupinData
• Anotherwaytotestmismatchhypothesis:
• Ask firms!
• Sincetheearly1970s,theNationalFederationofIndependentBusiness,asmallbusinessassociation,hassurveyeditsmemberstofindoutwhattheir‘topproblemis’.
• Theyareaskedtoselectfromamongthefollowing10categories:
• Taxes,Inflation,Poorsales,Finance&interestrates,Costoflabor,Governmentregulations&redtape,Competitionfromlargebusinesses,Qualityoflabor,Cost/availabilityofinsurance,Other.
Poorsaleshasbeenthebigproblem,not qualityoflabor.
FortheNFIBsurvey, firmsweregivenalistof10possible ‘singlemostimportantproblems’.Thenumbersinthechartreport thepercentoffirmslistingtheindicatedproblemasthemostimportant.Thechartreportsresults foronlyfourofthe10possible candidatesforthe‘singlemostimportantproblem’.Theothersixpossibleproblemswerechosen lessoftenthan‘poorsales’ .Seehttp://www.nfib.com/Portals/0/PDF/sbet/sbet201502.pdf
AnotherHypothesis:BadGovernment
• Policyuncertaintyandtoomuchregulation*.
• Baker,BloomandDavisconstructameasureofeconomicpolicyuncertainty.
• Theirindicatorcamedowntopre-recessionlevelsbyNovember2012• Nobigpickupinemploymentafterthat,suggestingthatwasnotamajorfactorholdingfirmsback.
*See:http://www.minneapolisfed.org/research/wp/wp694.pdf
Source:http://www.policyuncertainty.com/
August2011,debtceilingdispute
October2010,midtermelections
Jan.2013
Gov’tshutdownanddebtceilingSeptember2013
Summarysofar• TheGreatRecessionisindeedGreat
• Mismatch,uncertaintyandbadgovernmentpolicyhypotheses• seemunlikelyeitherasamajorcauseorsourceofpropagationoftheGreatRecession.
• IhavenotmentionedtheideathattheFedcausedtheGreatRecessionbykeepinginterestratestoolowinthepre-2007period.• Thishypothesisalsoseemsnottocommandmuchagreement.• See,e.g.,Bernanke(http://www.brookings.edu/blogs/ben-bernanke/posts/2015/04/28-taylor-rule-monetary-policy)fordiscussion.
• Thebehavioroflaborforceparticipationispuzzling,anddeservesgreaterattention.• See,e.g.,Christiano-Eichenbaum-Trabandt,AEJM,2015.
• Bottomline:GreatRecessionlookslikeaclassicdemand-shock recession.• Lowoutputandlowinflation.• But,whatisthesourceofthedemandshock???
TheBigQuestionsRemain
• WhatcausedGreatRecession,whyhasitlastedsolong?
• Whydidfewpeople(includingmacroeconomists)predictit?
• WhatimpactisithavingonMacroeconomicsasadiscipline?
SketchofEmergingConventionalWisdom• ImmediateCauseofGreatRecession:
• Aclassic19th century-stylerunontheUSbankingsystem(Gorton).• Therunwastriggeredbythecollapseofthehousingbubble.• Damagetofinancialsystemcontributedtocollapseininvestmentspending.
• Thebankingcrisiswasoverbytheendof2009.Whydidtherecessioncontinue?• Asubstantialnumberofhouseholdsfeltverypoorbecauseofthereductioninhouseprices.
• Thesehouseholdschosetocutbackonconsumptioninthehopeofincreasingsaving(Mian andSufi).
• ThebindingzerolowerboundontheinterestratetransformedthereductionsinconsumptionandinvestmentintoadropinGDP.• Withabigenoughfallintheinterestrate,employmentandGDPcouldhavebeeninsulatedfromtheshockstoconsumptionandinvestment.
Thisiswhatabankrunlookedlikehistorically.
Thistime,bankrunswereinvisibletomostpeople(Gorton).
TheDramaoftheBankRunsBroughttoLifeinSomeGreatMovies!
BankingCrisis,the‘ThePanicof2007’(Gorton)• Whatisabank?
• Borrowsshortrunandlendslongrun(‘maturitymismatch’)
• Example:• banktakesa$1depositandpromisestorepay$1inoneperiod.• Itlendsthemoneytoafirm,whichpromisestopaythe$1backintwo periods(zerointerest!)
• Thebankobviouslycannotinfactrepaythedepositinoneperiod.• Itcountsonthedepositor‘rollingover’theloanafteroneperiod.• Alternatively,thebankmustfindanotherlenderifthefirstlenderdoesn’twanttorollover.• Bank‘run’:whenabankcannotrolloveradepositorfindanotherlender.
• Whymightabankrunoccur?• Depositorsknowthatifbankcannotgetfunding,thenthebankmustsellloanataloss.• Inthatcase,depositorscannotgetalltheirmoneyback.• Thus,ifdepositorsthinktherewillbearun,it’sintheirinteresttorunnow:CRISIS!
But,howcantherebeabankrunwhenthereisdepositinsurance?
• Thedepositsofcommercialbanksareinsured.• Asaresult,thereisneverarunonacommercialbank.
• TherunsoccurredintheShadowBankingSystem.
• Asthenamesuggests,theshadowbankingsystemislivingintheshadows.
• Dataonfinancialfirmsisabyproductofregulation.• Shadowbankslightlyregulatedandsonotmuchwasknownaboutthem.• Littlewasknownaboutthembypoliticians,journalists,academicsandevenpolicymakers.
Howandwhydidtheshadowbankingsystemcomeintoexistence?• ShadowbankswereawaytoavoidregulationwhilemaintainingsomeprotectionfromtheFed.
• Federalreservepolicymakerssortofknewabouttheexistenceoftheshadowbanks,buttheylookedtheotherway.
• Thiswasinpartbecauseoftheprevailingmoodofthetime,thatregulationstiflescreativity.
• FedChairmanGreenspanfamouslybelievedinthepoweroffinancialmarketstoregulatethemselves.Later,herecanted(seehttp://www.nytimes.com/2008/10/24/business/economy/24panel.html)
• Thepreferenceoftheshadowbankingsystemformortgagesecuritiesdovetailedwithpoliticalprioritiesthatfavoredgettinglowincomehouseholdsintohousing(Rajan).
ExampleofaShadowBank:AStructuredInvestmentVehicle(SIV)• Supposeacommercialbankmakesamortgageloanof$100tosomeone.Thisiscalledaloanorigination.
• Longago,themortgagewouldhavestayedonthecommercialbank’sbooks.
• BeforethecrisistheywouldsellawholeportfolioofmortgagestoanSIV.
• TheSIVwouldpayforthemortgagesbyissuingshort-termsecurities,whichpeopleboughtthinkingtheywereriskfree.
• Asset-backedsecurities(ABS),asset-backedcommercialpaper(ABCP).• SIV’smadehugeprofitsbecausetheyhadanimplicitpromisefromoriginatingbanktobuybackthemortgagesincasetheywentbad.
• ThepromisewascrediblebecausetheoriginatingbankhadtheFedstandingbehinditincaseoftrouble.
ThePanicof2007• Housingpricesbegantosoftenandthenfallin2006.
• Therewasarealconcernthatso-calledsubprimemortgageswouldgobad.• Policymakerswererelativelyunconcernedbecausesubprimes totalled only$1trillion.• Whatnooneappreciatedwasthesizeoftheshadowbankingsystemanditsvulnerabilitytoruns.
• Holdersofasset-backedcommercialpaper(ABCP)becameskittish.• MucheasiertowithdrawfundsthantocarefullydeterminethesafetyoftheABCP.
• July30,2007aGermanbank,IKB,announcedthatitrequiredemergencyfunding.
• Problem:itsoff-balance-sheetvehicle(‘Rhineland’)wasnotabletorollovertheasset-backedcommercialpaper(ABCP)ithadbeenissuinginUSmarketstofunditslargeportfolioofUSmortgages.
• AlthoughnoneofthemortgagesintheRhinelandportfoliowasindefaultandonlysomeweresubprime-related,Rhinelandcreditorsdecidednottoroll.
• ThiscreatedacrisisforIKBbecauseitsreputationwouldsufferifitdidn’tstandbyRhineland.
July,2007
IssuanceofABCPabruptlystoppedinsummer,2007,aspartofthebankrun.
DANIELCOVITZ,NELLIELIANG,andGUSTAVOA.SUAREZ,TheEvolutionofaFinancialCrisis:CollapseoftheAsset-BackedCommercialPaperMarket,THEJOURNALOFFINANCE•VOL.LXVIII,NO.3•JUNE2013
Wheredidallthemoneycomefrom?
• Theshadowbankingsystemexpandedalotmorethananyoneknewatthetime.
• Itwasgettingalotofmoneyfromsomebody.• Fromwho?CertainlynotonlyfromAmericans.• Answer:GlobalSavingsGlut(Bernanke).
• Whywassomuchgoingintomortgages?• Suggestedanswer:BankingGlut(HyunShin).
Americanshavebeenabsorbingmoregoodsthantheyproduceformanyyears.
USCurrentAccountDeficit
• Americansarenetimportersofgoods.
• Balanceofpayments:
•Netimportsofgoodsequalsnetexportsoffinancialclaims.
• WhichcountriesisAmericaexportingfinancialclaimsto?
GrowingUScurrentaccountdeficitprimarilyagainstAsiaandOilExporters.
Whythebigimbalances?
• Hypothesis#1:Americansaregreedyandlazy.• Theyconsumemorethantheyproduce,sendIOU’stoforeigners.• Currentaccountdrivesthefinancialaccount.
• Hypothesis#2(SavingsGlut):ForeignersarehungryforUSfinancialassets.• Financialaccountdrivesthecurrentaccount.
• SimpleMundell-Flemingreasoningbehindhypothesis#2.• ForeignersloveUSassets,sotheybuytheminlargenumbers.• Causesdollarover-valuation,drivingUStradebalanceintodeficit.• USinterestratesdropasassetpricesbidupbyforeigners.
• Hypothesis#1impliesUSinterestratesriseasgreedyAmericanstrytoinducepeopletolendtothem.
Hypothesis#2(SavingsGlutHypothesis)winsbyawidemargin.
Source:Justiniano, Primiceri andTambalotti (2015),“TheEffectsoftheSavingandBankingGlutontheUSEconomy”.
Whydidsomuchmoneygointomortgages?• OneanswersuggestedbyHyunShinandothers.
• RecallthattheEuroAreacurrentaccountisroughlybalanced.• Onnet,financialflowsbetweentheUSandEAbalanced.
• But,thegrossflowsbetweenUSandEAarehugeandofaparticulartype.
• Inparticular,EuropeanbankshavebeenbuyingmortgagesinUSfinancialmarketsandfinancingthembyissuingABCPintheUSmarkets.
• RecallRhinelandandIKB.
Source:Justiniano, Primiceri andTambalotti (2015),“TheEffectsoftheSavingandBankingGlutontheUSEconomy”.
ConsistentwithideathathousingpurchasesbeingfundedbyInflowofforeigncapitalcorrespondingtocurrentaccountdeficit.
Houseprices
Currentaccount
SummaryofAnalysissoFar• Theanalysisjustdescribedbearsastrongsimilaritytoanalysesofemergingmarketcrisesin1990sandearlier.
• Foreignersgetallexcitedaboutagroupofemergingmarketeconomies.• Financialcapitalpoursintothateconomy.• Bigcurrentaccountdeficit.• Regulatorycontrolsbreakdown.• Stuffgoeswrong.• Foreignersrunaway,leavingthecountryinashambles(suddenstop).
• Therearesome differences.• America’sobligationsdenominatedindollars(nocurrencymismatchissues).• Nosuddenstop,nocurrencycrisis.• NoUSgovernmentdebtcrisis(indeed,iftherewasacrisisitwasthatthereistoolittle USgovernmentdebttosatisfyworlddemand).
Bankingcrisisisnotthewholestory.
Crisisappearstobeoverbysummer,2009,buteconomyremainsweakforyears.
Restofthestory
• Weakconsumptionbyhomeownersthatfeltpoorasaresultofdropinhousevalues.
• Theyhadboughttheirhousefortworeasons:• Niceplacetolive• Plannedtosellitwhenold,andthendownsizeandusethecapitalgainstoretire.• Part2oftheplandiedwiththehousingbust,sohouseholdshadtostartsaving.
Source:Mian andSufi, http://houseofdebt.org/2014/08/08/more-evidence-supporting-the-house-of-debt.html
Mian andSuficross-stateevidencethatfallinhousevalueledtocutbacksinspending.
ZeroLowerBound• JustbecauseonegroupofpeoplecutsbackonspendingdoesnotmeanyouhavetohaveaGreatRecession.
• Inawell-functioningmarketeconomy,interestrateshoulddroptoencouragesomeoneelsetospend.
• Ifsomeoneelsedoesnotexpandspending,arecessionwilloccur.
•GDP=C+I+G+NX• Thefactthattheinterestratehitthezerobound,preventedtheoperationofthishealingforce.
TheZeroLowerBoundIdea
Saving
Investment
LoanableFunds
R
0
‘Normaltimes’
TheZeroLowerBoundIdea
Saving
Investment
LoanableFunds
R
0
Crisis:loanmarketclearingrequires(impossible) negativeinterestrate.ClearingbroughtaboutbyfallinGDP,whichreducessavingforconsumption-smoothing reasons.
Whydidsofew(includingmacroeconomists)predicttheGreatRecession?• Noonewaspayingattentiontotheshadowbankingsystem.
• MostpeoplethoughtintermediationwentthroughthecommercialbanksregulatedbytheFed,orthroughordinarybondandequitymarkets.
• This‘normal’financialsystemseemedperfectlysafe.
• InthePanicof2007,mostpeoplehadneverheardofthemarketsthatwereinvolved.
• The‘shadowbankingsystem’wasnotonanyone’sradar.• EvensomeoneasastuteasBenBernankeacknowledgesthathevastlyunderestimatedthesystemicrisksposedbytheshadowbankingsystem.
ImplicationsforMacroeconomics
• TheGreatRecessionwasaconsequenceofamassivedemandshock.• Nothinghappenedtothesupplysideoftheeconomy.• Shocktoinvestment(residentialandnon-residential)andconsumption.• Weneedaframeworkinwhichdemandshockshaverealeffects.
• Becauseofthis,the(New)Keynesianmodelhascomeroaringbackinpopularity• Withstickyprices,demandshockscanhaveabigeffect,particularlyifthezerolowerboundbecomesbinding.
• But,theNewKeynesianmodelneedsfleshingout.• Fortunately,itisanexcellentplatformtobuildon.
What’stobedone?• ThelabormarketsideoftheNKmodelneedsimprovement.
• AnimportantpolicydebateeruptedduringtheGreatRecession:• Shouldweextendunemploymentbenefits?• Willtheymaketherecessionmoreseverebysubsidizingunemployment?• Or,willtheyhavenoeffectonemploymentandjustmakethelifeofunemployedpeoplemorebearable?
• TheNKmodelcannotaddressthispolicyquestion,butadvancesarebeingmadethatwillallowthemodeltodoso(seeChristiano-Eichenbaum-Trabandt,Econometrica,forthcoming!).
• LaborforceparticipationmovedinananomalouswayduringtheGreatRecession.• Needmodelsthatcanaddressthis.• Theseareunderconstruction(Christiano-Eichenbaum-TrabandtAEJM2015paper).
FinancialSideoftheNKModel
• Anumberofchallengespresentthemselves.
• Needamodelofthebankingsystemthatincorporatestheshadowbankingsystemandbankruns(see,e.g.,Gertler-Kiyotaki-Prestipino 2015).
• Usethemodeltocontemplatemacroprudentialpolicy.• Quantifytrade-offsbetweenriskinessandefficiencyofthebankingsystem.
• TheFedandTreasuryundertookvariouspoliciesthatseemedtoproducegoodresults(atleast,wedidn’thaveasecondGreatDepression!)• TheFedreplacedpartoftheprivateintermediationsystembyacquiringmassiveamountsofprivateassets.
• Muchprogresshasbeenmadeindevelopingmodelsthatcanbeusedtothinkaboutthis(Gertler-Kiyotaki,Christiano-Ikeda,2013,2014).
TheFuture• Integratingfinanceandlabormarketfrictionsintodynamicmodelsrequireswholenewkindsoftraining.
• Finance- mustmasterthevarioustypesofagencyproblemsinintermediation• Adverseselection, hiddeneffort,asymmetricinformationandcostlyverification,runningaway.
• Labormarkets– thelaborliteratureishugeandexplodingaswespeak.• Bargaining,dynamicmodelsofinsurance….hardstuff.Lotstobefoundinthelaborliterature.
• WhatIseeinmacroseminarsandconferencesinrecentyearsiscompletelydifferentfromwhatIsawbeforethecrisis.• Thedifferenceissobig,itfeelsasthoughwe’veallbeenstruckbyanearthquake.• Hence,thetitleformypresentation.
Thebigpicture?• Arguably,macroeconomicswasborninthe1930s,inthehorroroftheGreatDepression.• Thatiswhenthenationalincomeandproductaccounts(NIPA)weredeveloped.
• KeynesianeconomicswasorganizedaroundtheNIPAaccounts.• It’savisionunderwhichmarketeconomiesworkprettywellmuchofthetime.• But,sometimestheycanlapseintodysfunction,whengovernmentinterventionmaybehelpful.
• Thehistorysincethe1930s,particularlywiththerationalexpectationsrevolution,isoneofconstantlyimprovingthemicrofoundationsoftheframeworkinitiallysketchedbyKeynes.• Amacroeconomyhaslotsofmovingparts.• Microfoundationsverifiesthattheyareallmovingtogethersensibly.
• Inrecentyears,thatframeworkenteredanothergrowthspurt.