Sunday, December 4, 2011

"which correspond to the business cycle"

From yesterday:

The longwave decline of interest rates (since 1981) displays a pattern of smaller peaks and valleys which correspond to the business cycle.

See those crossed-out words there? They started as an afterthought, those six words. Then I stuck a "should" in there. Then I thought Well, it's easy enough to tell:

Graph #1: FRED GS10 Interest, Monthly (blue) & Annual (red)


On the way up, the generalization applies. From the 1950s to 1981 it is quite evident that interest rates rise between recessions and fall during recessions. After 1981, that is quite evidently not the case. Also, 1974.

After 1981 interest rates fall during recessions and, except briefly, also fall between recessions.


Jazzbumpa said...

Coming from a different direction Krugman addressed this just yesterday.

Pre-1985, recessions were basically generated by the Fed to curb inflation; since the Fed could and would relax the reins as soon as it judged that we had suffered enough, deep recessions tended to be followed by rapid V-shaped recoveries, so it made sense for businesses to keep investing even in the face of a depressed economy. Subsequent recessions have reflected private-sector overreach, and have therefore tended to be followed by slower recoveries, giving businesses a good reason to postpone or cancel investments.

Recent recessions have not been steep declines. Even the current one was preceded by a decade of reduced GDP growth. Recoveries have been mostly jobless.

I'll posit that Fed tools are potent in an expanding and/or inflationary economy. Since ca. 1980, we have been in a secular trend of disinflation. In this environment Fed tools are progressively less potent. At the ZIB, they are powerless.

I think this is the essence of Keynes, and exactly why we need fiscal stimulus now.


Jazzbumpa said...

This observation is an aspect of th differences between the golden age and the great stagnation.

More elaboration here, that might even be relevant.