Policy Analysis in the Post Great
Recession Era
Peter Rupert
Department of Economics, UCSB
Associate Director, LAEF
Istanbul
October 17, 2014
Issues Facing Various Policy Makers
US economy and the Fed
slow growth
labor market weak
inflation low
households deleveraging
cash holdings are high
Europe economies also very weak
GDP Growth During an Expansion
6
8
Average, annualized rate of change
5.71
5.35
4.88
4.44
4.18
3.91
4
3.82
3.5
2.74
0
2
2.09
1949 Q1
1954 Q2
1958 Q2
1961 Q1
1970 Q4
1975 Q1
1982 Q4
1991 Q1
2001 Q4
2009 Q2
Trough Date
Economic Forecast Project
Source: BEA
Of Unemployed, Percent 27 Weeks and Over
10
20
30
40
Percent
1948
1955
Economic Forecast Project
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010 2014
Source: FRB St. Louis
Employed Part−time for Economic Reasons
3000
4000
5000
6000
7000
8000
9000
Thousands of persons, Seasonally Adjusted
1997
Econsnapshot.com
1999
2001
2003
2005
2007
2009
2011
2013
2014
Source: U.S. Department of Labor
Transition Rate from Part−time for Economic Reasons to Full−time
0.30
0.35
0.40
0.45
0.50
Probability of getting a full time job during the year, Seasonally Adjusted
1997
Econsnapshot.com
1999
2001
2003
2005
2007
2009
2011
2013
2014
Source: U.S. Department of Labor
Personal Consumption Expenditures, Chain−type Price Index
0
2
4
6
8
10
12
Percent change from last year
1959
1964
1968
Economic Forecast Project
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
Source: BEA
Average Hourly Earnings, Production and Salary Workers, Total Private
2
4
6
8
Percent change from a year ago
1964
1968
1972
Economic Forecast Project
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
Source: BLS
Household Leverage
0.4
0.6
0.8
1.0
1.2
Liabilities to Income
1949
1955
1960
Economic Forecast Project
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Flow of Funds, Federal Reserve
Household Net Worth (Assets−Liabilities)
3.5
4.0
4.5
Ratio to GDP
1949
1955
1960
Economic Forecast Project
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Flow of Funds, Federal Reserve
Real Personal Consumption Expenditures
−10
−5
0
5
10
15
20
Annualized percent change from last quarter
1947
1955
Economic Forecast Project
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: BEA
So?
what problems are we facing?
are we stuck somehow?
Benhabib, Schmitt-Grohe, Uribe (2001)
Waiting for a Rate Change?
don’t hold your breath
given substantial weakness in the labor market
and no evidence of inflation in sight
What Next?
increase nominal rates?
ECB presumably wants to increase
inflation..how?
What Next?
QE?
Draghi: “So QE is an outright purchase of assets.
To give an example: rather than accepting these
assets as collateral for lending, the ECB would
outright purchase these assets. Thats QE. It
would inject money into the system.”
why should that matter?
TLTRO: subsidized lending...how does expansion of
credit or reallocation lead to inflation?
reducing refinancing rate (0.05%) and interest on
reserves (-0.20%)...here think about the Bullard
picture above
“policy” trap
What Next?
forward guidance?
What Next?
but lots of uncertainty remains in the US
too-big-to-fail and bailouts
Excess Reserves
0.0
0.5
1.0
1.5
2.0
2.5
Trillions of Dollars
1984
1988
Economic Forecast Project
1992
1996
2000
2004
2008
2012
2014
Source: FRB St. Louis
What Next?
growth is the way out
not stimulus
structural reform is key
labor markets, business climate, deficits, etc.
Gross Federal Debt Held by the Public
20
40
60
80
100
Percent of GDP
1939
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Economic Forecast Project
Source: FRB St. Louis
Thank You