Thursday, October 19, 2017

Real growth

In writing my post that went up this afternoon, I became interested in looking closely at US real GDP (RGDP) in terms of a dynamic equilibrium model for nominal GDP (NGDP) and the GDP deflator (DEF) where RGDP = NGDP/DEF. So I went ahead an tried to put together a detailed description of the NGDP data and the DEF data. This required several shocks, but one of the interesting aspects was that there appears to be two regimes:
1. The demographic transition/Phillips curve regime (1960-1990)
2. The asset bubble regime (1990-2010)
The DEF data looks much like the PCE data that I referenced in talking about a fading Phillips curve. The NGDP data is essentially one major transition coupled with two big asset bubbles (dot-com and housing):


These are decent models of the two time series:


Taking the ratio gives us RGDP, and the (log) derivative give us the RGDP growth rate


It's a pretty good model. The main difference is that for the "Phillips curve" recessions, there are large narrow shocks RGDP near the bottom of those business cycles that both narrower and larger in magnitude than we might expect (these are in fact the shocks associated with spiking unemployment rates). We can also separate out the contributions from NGDP and DEF:


Without the data it's easier to see (and I added some labels as well):


It does not currently look like there is another asset bubble forming. This is consistent with the dynamic equilibrium model for household assets, and you can also tell the dot-com bubble was a stock bubble as it shows up in assets and the S&P 500 model. In fact, today's equilibrium in both NGDP and DEF is actually somewhat unprecedented. We might even call it a third regime
3. The equilibrium (2010-present)
In the past, the things that caused business cycles were war, demographic transitions, and asset bubbles. What if there aren't any more recessions? That would be a strange world for macroeconomics. Maybe macro is confused today about productivity slowdowns and secular stagnation because we've finally reached equilibrium when everyone thought the economy was in equilibrium at least at times in the past? In fact, the mid-50s and mid-90s were actually the only times we were close. 

I am pretty sure there will be some asset bubble (or war) in the future because humans. I have no idea what that asset (or war) will be, but it's something we should keep our eyes on. At least, if this model is accurate — therefore I will continue to test it.

But maybe we've finally reached Keynes' flat ocean?

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