Why are Macro-economic Growth Forecasts so wrong?

Why are Macro-economic Growth Forecasts so wrong?

 

There are several institutions which publish economic forecasts annually/quarterly.

  • IMF
  • OECD
  • EC

Central Banks of Nations also publish economic Forecasts.  For Example:

  • Federal Reserve Bank of USA
  • Bank of England
  • Bank of Canada
  • Riksbank of Sweden
  • European Central Bank

 

There are several surveys of professional forecasters which create consensus forecasts to improve the accuracy of forecasts.

  • US Fed Reserve Survey of Professional Forecasters
  • ECB Survey of Professional Forecasters
  • Consensus Forecasts by Consensus Forecasts
  • Federal Reserve Blue Book
  • Federal Reserve Livingston Survey
  • Blue Chip Economic Forecasts by Wolters Kluwers

 

International Forecasting organizations (Private and Government)

  • IMF, “World Economic Outlook”;
  • EC, “European Economic Forecast”;
  • OECD, “OECD Economic Outlook”;
  • Consensus Economics, “Consensus Forecasts”;
  • The Economist, “The Economist pool of forecasters”.

 

USA Private and Government Economic Forecasters

  • Fed Reserve Survey of Professional Forecasters
  • Blue Chip Economic Indicators ( Wolters Kluwer)
  • Green Book
  • Livingston Survey
  • CBO
  • FOMC
  • Office of Management and Budget (OMB)
  • Western Blue Chip Economic Forecast

 

From Swiss Re Report May 2017

imfforecast

From Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors: The Federal Reserve’s Approach

RMSE GDP

 

Surveys of Economic Forecasters:

list

 

USA Private Economic Forecasters

There are many private forecasters who also publish forecasts.  For Example:

  • The Conference Board
  • Wells Fargo Bank
  • Goldman Sachs
  • Citi Group
  • Haver Analytics
  • RSQE Forecasts at University of Michigan

 

See the lists below for almost all of professional forecasters.

private forecasters USA

 

From Blue Chip Economic Forecast:

bluechip2bluechip

From Social Learning, Strategic Incentives and Collective Wisdom: An Analysis of the Blue Chip Forecasting Group

forecastersforecasters2

 

There is also in UK:

  • NIESR ( National Institute of Economic and Social Research)

 

From time to time many of these organizations review quality of their forecasts.  Results of these studies are published in papers many of which are listed in references below.

After the global financial Crisis of 2008-2009, many institutions have taken another look at their models used for forecasting economic variables.

See recent papers by

  • Bank of Canada
  • IMF
  • OECD
  • Fed Reserve
  • Bank of England
  • Riksbank of Sweden
  • US CBO
  • Bank of Portugal
  • European Commission

 

From Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors: The Federal Reserve’s Approach

Since late 2007, the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve has regularly published assessments of the uncertainty associated with the projections of key macroeconomic variables made by individual Committee participants.1 These assessments, which are reported in the Summary of Economic Projections (SEP) that accompanies the FOMC minutes once a quarter, provide two types of information about forecast uncertainty. The first is qualitative in nature and summarizes the answers of participants to two questions: Is the uncertainty associated with his or her own projections of real activity and inflation higher, lower or about the same as the historical average? And are the risks to his or her own projections weighted to the upside, broadly balanced, or weighted to the downside? The second type of information is quantitative and provides the historical basis for answering the first qualitative question. Specifically, the SEP reports the root mean squared errors (RMSEs) of real-time forecasts over the past 20 years made by a group of leading private and public sector forecasters.

 

Some have blamed the entire economics profession.  Several attempts are being made to improve economic analysis.  Examples include work being done at

  • INET ( Institute for New Economic Thinking)
  • NAEC  at OECD

Heterodox schools of economics are making claims to accuracy of their approach after failure of main stream orthodox New Classical economics in predicting the Global Financial Crisis.

I will create another post later for some of these issues.

  • GDP forecasts errors have been attributed to errors in GDP components of business investments and exports.
  • Variability of GDP forecasts from short term to long term
  • Variability of GDP forecasts between forecasters – private and governments

 

Key Sources of Research:

 

The Case of Serial Disappointment

Justin‐Damien Guénette, Nicholas Labelle St‐Pierre, Martin Leduc and
Lori Rennison

Bank of Canada Staff Analytical Note 2016-10
July 2016

The Case of Serial Disappointment

 

ToTEM: The Bank of Canada’s New Quarterly Projection Model

Stephen Murchison and Andrew Rennison

Research Department
Bank of Canada

2006

ToTEM: The Bank of Canada’s New Quarterly Projection Model

 

 

ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model

José Dorich, Michael Johnston, Rhys Mendes, Stephen Murchison and Yang Zhang

Canadian Economic Analysis Department
Bank of Canada

2013

ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model

 

 

Introducing the Bank of Canada’s Projection Model for the Global Economy

Jeannine Bailliu, Patrick Blagrave, and James Rossiter

International Economic Analysis Department
Bank of Canada

2010

Introducing the Bank of Canada’s Projection Model for the Global Economy

Introducing the Bank of Canada’s Projection Model for the Global Economy

 

 

BoC-GEM: Modelling the World Economy

René Lalonde, International Economic Analysis Department

Dirk Muir, International Monetary Fund

BANK OF CANADA REVIEW SUMMER 2009

BoC-GEM: Modelling the World Economy

 

 

MUSE: The Bank of Canada’s New Projection Model of the U.S. Economy

Marc-André Gosselin and René Lalonde
International Department
Bank of Canada

2005

MUSE: The Bank of Canada’s New Projection Model of the U.S. Economy

 

 

OECD FORECASTS DURING AND AFTER THE FINANCIAL CRISIS: A POST MORTEM

OECD Economics Department
Policy Note no. 23
February 2014

OECD FORECASTS DURING AND AFTER THE FINANCIAL CRISIS: A POST MORTEM

 

 

THE USE OF MODELS IN PRODUCING OECD MACROECONOMIC FORECASTS

OECD ECONOMICS DEPARTMENT WORKING PAPERS NO. 1336
By David Turner

2016

THE USE OF MODELS IN PRODUCING OECD MACROECONOMIC FORECASTS

 

 

Lessons from OECD forecasts during and after the financial crisis

Christine Lewis and Nigel Pain

OECD Journal: Economic Studies
Volume 2014

Lessons from OECD forecasts during and after the financial crisis

 

 

How accurate are OECD forecasts?

12 February 2014
by Brian Keeley

 

Home Glossary About Contact Disclaimer How accurate are OECD forecasts?

 

 

Debate the Issues: Complexity and Policy making

OECD

Edited By:Patrick Love, Julia Stockdale-Otárola

06 June 2017

Debate the Issues: Complexity and Policy making

 

 

We need an empowering narrative

OECD Insights
23 June 2017
Gabriela Ramos

 

 

Final NAEC Synthesis : New Approaches to Economic Challenges

OECD

2015

Final NAEC Synthesis New Approaches to Economic Challenges

 

Debate the Issues: New Approaches to Economic Challenges

OECD

2016

Debate the Issues: New Approaches to Economic Challenges

 

OECD Forecasts During and After the Financial Crisis

A Post Mortem

Nigel Pain, Christine Lewis, Thai-Thanh Dang, Yosuke Jin, Pete Richardson

17 Mar 2014

OECD Forecasts During and After the Financial Crisis A Post Mortem

 

 Outlook for the Budget and the Economy

CBO USA

Outlook for the Budget and the Economy

 

CBO’s Economic Forecasting Record: 2015 Update

US CBO

CBO’s Economic Forecasting Record: 2015 Update

 

“Gauging the Uncertainty of the Economic
Outlook Using Historical Forecasting Errors: The Federal Reserve’s Approach,”

Finance and Economics Discussion Series 2017-020.

Washington: Board of Governors of the Federal Reserve System

“Gauging the Uncertainty of the Economic Outlook Using Historical Forecasting Errors: The Federal Reserve’s Approach

 

 The FRB/US Model: A Tool for Macroeconomic Policy Analysis

lint Brayton, Thomas Laubach, and David Reifschneider

2014

The FRB/US Model: A Tool for Macroeconomic Policy Analysis

 

 

 Gauging the Uncertainty of the Economic Outlook from Historical Forecasting Errors

David Reifschneider and Peter Tulip

federal Reserve

2007-60

Gauging the Uncertainty of the Economic Outlook from Historical Forecasting Errors

 

The IMF/WEO Forecast Process

Hans Genberg, Andrew Martinez, and Michael Salemi

IMF

2014

The IMF/WEO Forecast Process

 

 

On the Accuracy and Efficiency of IMF Forecasts: A Survey and Some Extensions

Hans Genberg and Andrew Martinez

IMF

2014

On the Accuracy and Efficiency of IMF Forecasts: A Survey and Some Extensions

 

 

An Evaluation of Commissioned Studies : Assessing the Accuracy of IMF Forecasts

Prepared by Charles Freedman
February 12, 2014

IMF

An Evaluation of Commissioned Studies : Assessing the Accuracy of IMF Forecasts

 

 

An Assessment of IMF Medium-Term Forecasts of GDP Growth

Carlos de Resende

2014

IMF

An Assessment of IMF Medium-Term Forecasts of GDP Growth

 

 

THE POLITICS OF IMF FORECASTS

AXEL DREHER
SILVIA MARCHESI
JAMES RAYMOND VREELAND

CESIFO WORKING PAPER NO. 2129

OCTOBER 2007

THE POLITICS OF IMF FORECASTS

 

 

Macroeconomic Forecasting: A Survey

K Wallis

1989

Macroeconomic Forecasting: A Survey

 

 

INTERNATIONAL ORGANISATIONS’ VS. PRIVATE ANALYSTS’ FORECASTS:

AN EVALUATION

Ildeberta Abreu

Banco de Portugal
July 2011

International organisations’ vs. private analysts’ forecasts: an evaluation

https://www.bportugal.pt/sites/default/files/anexos/papers/ab201105_e.pdf

 

 

On Macroeconomic Forecasting

Simon Wren-Lewis

2014

On Macroeconomic Forecasting

 

Why central banks use models to forecast

Simon Wren-Lewis

2014

Why central banks use models to forecast

USA Survey of Economic Professional Forecasters

ECB Survey of Economic Professional Forecasters

 

Trading Economics

 

Oxford Economics

 

Consensus Economics

IHS Markit

 

Evaluating forecast performance

Bank of England

Independent Evaluation Office | November 2015

Evaluating forecast performance

 

 

 Does the FederaL Reserve Staff Still beat Private Forecasters?

Makram El-Shagi, Sebastian Giesen and Alexander Jung

2014

 

DoeS THe FeDeraL reSerVe STaFF STiLL beaT PriVaTe ForeCaSTerS?

 

 

Modern Forecasting Models in Action: Improving Macroeconomic Analyses at
Central Banks

Malin Adolfson, Michael K. Andersson, Jesper Lind´e,
Mattias Villani, and Anders Vredina

Sveriges Riksbank
CEPR
Stockholm University

Modern Forecasting Models in Action: Improving Macroeconomic Analyses at Central Banks

 

 

Updated Historical Forecast Errors (4/9/2014)

Federal Reserve

Updated Historical Forecast Errors (4/9/2014)

 

 

How good is the forecasting performance of major institutions?

Riksbank of Sweden

Monetary Policy Department.

How good is the forecasting performance of major institutions?

 

 

Best Economic Forecaster Awards

Focus Economics

Best Economic Forecaster Awards

 

Has Output Become More Predictable? Changes in Greenbook Forecast Accuracy

Federal Reserve

Has Output Become More Predictable? Changes in Greenbook Forecast Accuracy

 

Green Book

Federal Reserve Bank of Philadelphia

Green Book

 

US Federal Reserve Livingston Survey

Federal Reserve Bank of Philadelphia

Livingston Survey

 

 

The IMF and OECD versus Consensus Forecasts

by
Roy Batchelor
City University Business School, London
August 2000

The IMF and OECD versus Consensus Forecasts

 

 

CBO’s January 2017 Budget and Economic Outlook

CRFB

CBO’s January 2017 Budget and Economic Outlook

 

 

Growth Forecast Errors and Fiscal Multipliers

Prepared by Olivier Blanchard and Daniel Leigh

January 2013

IMF

http://www.nber.org/papers/w18779

Central Bank Macroeconomic Forecasting during the global Financial Crisis: the European Central Bank and Federal Reserve Bank of New York experiences

no 1688 / july 2014

 

 

Economic Forecasting and its Role in Making Monetary Policy

RB Australia

1999

 

https://www.rba.gov.au/publications/bulletin/1999/sep/pdf/bu-0999-1.pdf

 

Are Forecasting Models Usable for Policy Analysis?

1986

Chris Sims

Minneapolis Federal Reserve

 

https://www.minneapolisfed.org/research/QR/QR1011.pdf

 

Persistent Overoptimism about Economic Growth

BY KEVIN J. LANSING AND BENJAMIN PYLE

2015

 

http://www.frbsf.org/economic-research/files/el2015-03.pdf

 

 

Federal Reserve economic projections: What are they good for?

Ben S. Bernanke

Monday, November 28, 2016

https://www.brookings.edu/blog/ben-bernanke/2016/11/28/federal-reserve-economic-projections/

 

Reassessing Longer-Run U.S. Growth: How Low?

John G. Fernald
Federal Reserve Bank of San Francisco

August 2016

 

http://www.frbsf.org/economic-research/files/wp2016-18.pdf

 

 

Recent declines in the Fed’s longer-run economic projections

by Jonas D. M. Fisher,

Christopher Russo,

2017

https://www.chicagofed.org/publications/chicago-fed-letter/2017/375

 

 

“How Accurate Are Private Sector Forecasts? Cross-Country Evidence from Consensus Forecasts of Output Growth.”

Prakash Loungani

2000

IMF

https://www.imf.org/external/pubs/ft/wp/2000/wp0077.pdf

 

The Failure to Forecast the Great Recession

Simon Potter

 

Liberty Street Economics / New York Federal Reserve Bank

http://libertystreeteconomics.newyorkfed.org/2011/11/the-failure-to-forecast-the-great-recession.html

 

 

Social Learning, Strategic Incentives and Collective Wisdom: An Analysis of the Blue Chip Forecasting Group

J. Peter Ferderer Department of Economics Macalester College
St. Paul, MN 55105 ferderer@macalester.edu

Adam Freedman Chicago, IL 60601 freedman.adamj@gmail.com

July 22, 2015

 

http://muse.union.edu/lamacroworkshop2015/files/2015/01/34-Ferderer-Blue-Chip-Collective-Wisdom.pdf

 

 

CBO’s Economic Forecasting Record 2013 Update

 

https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/43846-ForecastingRecord.pdf

 

CBO’s Economic Forecasting Record 2015 Update

https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/49891-Forecasting_Record_2015.pdf

 

CBO Recurring reports

https://www.cbo.gov/about/products/major-recurring-reports#7

 

European Commission’s Forecasts Accuracy Revisited: Statistical Properties and Possible Causes of Forecast Errors

Marco Fioramanti, Laura González Cabanillas, Bjorn Roelstraete and Salvador Adrian Ferrandis Vallterra

2016

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2753854

 

 

Western Blue Chip Economic Forecast

Arizona State University

JPMorgan Chase Economic Outlook Center

https://research.wpcarey.asu.edu/economic-outlook/western-blue-chip/state-forecasts-archive-download?type=pdf&year=2017&month=08&state=Summary

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Low Interest Rates and Business Investments : Update August 2017

Low Interest Rates and Business Investments : Update August 2017

 

From  Explaining Low Investment Spending

USINVEST

globalinvest

 

Please see my earlier posts.

Business Investments and Low Interest Rates

Mergers and Acquisitions – Long Term Trends and Waves

The Decline in Long Term Real Interest Rates

Short term Thinking in Investment Decisions of Businesses and Financial Markets

Low Interest Rates and Monetary Policy Effectiveness

Low Interest Rates and Banks’ Profitability : Update July 2017

Low Interest Rates and Banks Profitability: Update – December 2016

 

Since my earlier posts on this subject there has been several new studies published highlighting weakness in business investments as one of the cause of slower economic growth and lower interest rates.

Other significant factors impacting interest rates are demographic changes, and slower economic growth.

I argue that there is mutual (circular) causality in weak business investment, slower economic growth, and lower interest rates which reinforce each other.

 

Decreased competition, increased concentration, corporate savings glut, share buybacks, paying dividends are also identified as factors.

Number of public companies have decreased significantly in USA since 1996 due to M&A activity.   See the data below.

Increased Mergers/Acquisitions, Increased Concentration, Decreased Competition, Decreased Number of Public Companies, Share buybacks, and Dividend Payouts are multiple perspectives of same problem.

 

From The Incredible Shrinking Universe of Stocks

The Causes and Consequences of Fewer U.S. Equities

USNUMUSSTAT

 

Key sources of Research:

The Low Level of Global Real Interest Rates

Remarks by
Stanley Fischer
Vice Chairman
Board of Governors of the Federal Reserve System

at the
Conference to Celebrate Arminio Fraga’s 60 Years
Casa das Garcas, Rio de Janeiro, Brazil

July 31, 2017

The Low Level of Global Real Interest Rates

 

 

INVESTMENT-LESS GROWTH: AN EMPIRICAL INVESTIGATION

German Gutierrez Thomas Philippon

Working Paper 22897

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue
Cambridge, MA 02138

December 2016

 

INVESTMENT-LESS GROWTH: AN EMPIRICAL INVESTIGATION

 

 

Explaining Low Investment Spending

The NBER Digest
NATIONAL BUREAU OF ECONOMIC RESEARCH

February 2017

Explaining Low Investment Spending

 

 

The Secular Stagnation of Investment?

Callum Jones and Thomas Philippon

December 2016

 

The Secular Stagnation of Investment?

 

 

Is there an investment gap in advanced economies? If so, why?

By Robin Dottling, German Gutierrez and Thomas Philippon

 

Is there an investment gap in advanced economies? If so, why?

 

 

The Disappointing Recovery of Output after 2009

JOHN G. FERNALD ROBERT E. HALL

JAMES H. STOCK MARK W. WATSON

May 2, 2017

The Disappointing Recovery of Output after 2009

 

 

Declining Competition and Investment in the U.S.

German Gutierrez and Thomas Philippon

NATIONAL BUREAU OF ECONOMIC RESEARCH

July 2017

 

Declining Competition and Investment in the U.S

 

 

Real Interest Rates Over the Long Run : Decline and convergence since the 1980s

Kei-Mu Yi   Jing Zhang

ECONOMIC POLICY PAPER 16-10 SEPTEMBER 2016

FEDERAL RESERVE BANK of MINNEAPOLIS

Real Interest Rates over the Long Run Decline and convergence since the 1980s, due significantly to factors causing lower investment demand

 

 

Understanding global trends in long-run real interest rates

Kei-Mu Yi and Jing Zhang

Economic Perspectives, Vol. 41, No. 2, 2017
Chicago Fed Reserve Bank

 

Understanding Global Trends in Long-run Real Interest Rates

 

 

Weakness in Investment Growth: Causes, Implications and Policy Responses

CAMA Working Paper 19/2017 March 2017

M. Ayhan Kose

Franziska Ohnsorge

Lei Sandy Ye

Ergys Islamaj

 

Weakness in Investment Growth: Causes, Implications and Policy Responses

 

 

Are US Industries Becoming More Concentrated?

Gustavo Grullon, Yelena Larkin and Roni Michaely

October 2016

 

Are US Industries Becoming More Concentrated?

 

 

Why Is Global Business Investment So Weak? Some Insights from Advanced Economies

 

Robert Fay, Justin-Damien Guénette, Martin Leduc and Louis Morel,

International Economic Analysis Department

Bank of Canada Review Spring 2017

 

Why Is Global Business Investment So Weak? Some Insights from Advanced Economies

 

 

What Is Behind the Weakness in Global Investment?

by Maxime Leboeuf and Bob Fay

2016

Bank of Canada

 

What Is Behind the Weakness in Global Investment?

 A Structural Interpretation of the Recent Weakness in Business Investment

by Russell Barnett and Rhys Mendes

 The Corporate Saving Glut in the Aftermath of the Global Financial Crisis

 

Gruber, Joseph W., and Steven B. Kamin

International Finance Discussion Papers
Board of Governors of the Federal Reserve System
Number 1150 October 2015

 

The Corporate Saving Glut in the Aftermath of the Global Financial Crisis

 

 

The Incredible Shrinking Universe of Stocks

The Causes and Consequences of Fewer U.S. Equities

March 22, 2017

GLOBAL FINANCIAL STRATEGIES

http://www.credit-suisse.com

 

The Incredible Shrinking Universe of Stocks The Causes and Consequences of Fewer U.S. Equities

 

 

They Just Get Bigger: How Corporate Mergers Strangle the Economy

Jordan Brennan

2017 February 19

They Just Get Bigger: How Corporate Mergers Strangle the Economy

 

 

Rising Corporate Concentration, Declining Trade Union Power, and the Growing Income Gap: American Prosperity in Historical Perspective

Jordan Brennan

March 2016

 

Rising Corporate Concentration, Declining Trade Union Power, and the Growing Income Gap: American Prosperity in Historical Perspective

 

 

The Oligarchy Economy: Concentrated Power, Income Inequality, and Slow Growth

Corporate concentration exacerbates income inequality

 

Jordan Brennan

March 2016

http://evonomics.com/the-oligarchy-economy/

Low Interest Rates and Banks’ Profitability : Update July 2017

Low Interest Rates and Banks’ Profitability : Update July 2017

 

Please see my previous posts.

Impact of Low Interest Rates on Bank’s Profitability

Low Interest Rates and Banks Profitability: Update – December 2016

 

Since December 2016, there are several new studies published which study low interest rates and Banks profitability.

 

 

Liberty State economics – a Blog of New York Federal Reserve has published a new column in June 2017.

Low Interest Rates and Bank Profits

 

 

Reduced Viability? Banks, Insurance Companies, and Low Interest Rates

CFA Institute

2016

CFA Institute Blog: Low Interest Rates and Banks

 

 

Changes in Profitability for Primary Dealers since the Financial Crisis

Benjamin Allen

Skidmore College

2017

Changes in Profitability for Primary Dealers since the Financial Crisis

 

 

Deloitte Consulting has published a new report in 2017 on Bank Models viability in environment of low interest rates.

Business model analysis European banking sector model in question

 

THE EFFECT OF NEGATIVE INTEREST RATES ON EUROPEAN BANKING
July 7, 2016
International banker

 

https://internationalbanker.com/banking/effect-negative-interest-rates-european-banking/

 

 

Low interest rates place a strain on the banks

bank of Finland

2016

https://www.bofbulletin.fi/en/2016/2/low-interest-rates-place-a-strain-on-the-banks/

 

 

The profitability of EU banks: Hard work or a lost cause?

KPMG

October 2016

 

https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2016/10/the-profitability-of-eu-banks.pdf

 

 

The influence of monetary policy on bank profitability

Claudio Borio

2017

http://onlinelibrary.wiley.com/doi/10.1111/infi.12104/abstract

 

 

Can Low Interest Rates be Harmful: An Assessment of the Bank Risk-Taking Channel in Asia

2014

Asian Development Bank

 

https://www.adb.org/sites/default/files/publication/31204/reiwp-123-can-low-interest-rates-harmful.pdf

 

 

Determinants of bank’s interest margin in the aftermath of the crisis: the effect of interest rates and the yield curve slope

Paula Cruz-García, Juan Fernández de Guevara and Joaquín Maudos

 

http://www.uv.es/inteco/jornadas/jornadas13/Cruz-Garcia,%20Fernandez%20and%20Maudos_XIII%20Inteco%20Workshop.pdf

 

 

Dutch Central Bank has published a new study in November of 2016 on Banks’ Profitability and risk taking in a prolonged environment of Low Interest Rates.

Bank profitability and risk taking in a prolonged environment of low interest rates: a study of interest rate risk in the banking book of Dutch banks

 

 

Net interest margin in a low interest rate environment: Evidence for Slovenia

Net interest margin in a low interest rate environment: Evidence for Slovenia

 

Global Financial Stability Report, April 2017: Getting the Policy Mix Right

IMF

2017

IMF Global Financial Stability Report April 2017

 

 

Negative Interest Rates: Forecasting Banks’ Profitability in a New Environment

Stefan Kerbl, Michael Sigmund

Bank of Finland

Negative Interest Rates: Forecasting Banks’ Profitability in a New Environment

 

 

Low Interest Rates and the Financial System

Remarks by Jerome H. Powell
Member Board of Governors of the Federal Reserve System
at the 77th Annual Meeting of the American Finance Association
Chicago, Illinois
January 7, 2017

https://www.federalreserve.gov/newsevents/speech/powell20170107a.pdf

 

 

Bad zero: Financial Stability in a Low Interest Rate Environment

Elena Carletti  Giuseppe Ferrero

18 June 2017

https://www.dnb.nl/en/binaries/paper%20Carletti_Ferrero_18June2017_tcm47-360758.pdf

Economic Growth Theories – Orthodox and Heterodox

Economic Growth Theories – Orthodox and Heterodox

My humble  attempt to make sense of Economic Growth Theories.

 

Economic Growth (Trend) and Business Cycles ( Fluctuations)

Growth- Cycles

Economists distinguish between short-run economic changes in production and long-run economic growth. Short-run variation in economic growth is termed the business cycle. Generally, economists attribute the ups and downs in the business cycle to fluctuations in aggregate demand. In contrast, economic growth is concerned with the long-run trend in production due to structural causes such as technological growth and factor accumulation.

 

economic-growth-5

Types of Models

  • Economic Cycles Vs Business Cycles Vs Financial Cycles
  • Economic Growth , Business Growth, Financial Growth
  • Equilibrium Vs. Non Equilibrium
  • Deterministic vs Stochastic
  • Linear Vs Non Linear Models

 

From Introduction to Post Keynesian Economics / Lavoie

economic-schools

 

Classical and Neo Classical Growth Models

(Equilibrium Models) – Supply Side / No aggregate demand -Say Law

  • Wassily Leontief – Input-Output Linear Models
  • John Von Neumann
  • Cass – T Koopmans
  • Solow Swan Growth Model
  • Ramsey Model
  • Endogenous Growth Theory
    • Robelo – AK Model
    • Uzawa – Lucas Model
    • Romer Model
    • Jones Model
    • Grossman Helpman
    • Aghion and Howitt
    • Barro
  • DSGE Models
  • Real Business Cycles

 

Classical/Neo Classical /Monetarists/Neo Keynesian  Economists

  • Alfred Marshall
  • Leon Walrus
  • Irving Fisher
  • Paul Samuelson – Multiplier Accelerator
  • John Maynard Keynes
  • Alvin Hansen – IS-LM Framework
  • AW Phillips
  • Robert M Solow – Neo Classical Growth Model
  • Trevor W Swan
  • Paul Romer – Endogenous Growth Theory
  • Robert Lucas, Jr.
  • Milton Friedman
  • James Tobin
  • John G Gurley
  • Edward S Shaw
  • Knut Wicksell 
  • Franco Modigliani
  • James Meade
  • Luigi Pasinetti
  • Piero Sraffa

 

Keynesian Growth Models

Role of Aggregate Demand

  • John M Keynes Model
  • Harrod Domar Model
  • Hicks – Hansen IS-LM Model
  • AD-AS
  • Tobin’s Model
  • New Keynesian Models
  • Non Walrasion Equilibrium models
  • Phillips Curve

 

economic-growth-2economic-growth-3economic-growth-theory

 

economic-growth-4

 

Heterodox Schools

  • Institutionalist
  • Cambridge Keynesians
  • American Post Keynesians
  • Evolutionary Economics
  • Complexity School/Santa Fe
  • System Dynamics
  • Behavioral Economics
  • Austrian Economics
  • Ecological Economics

 

Cambridge/Oxford Keynesians

(Dynamic/Business Cycles/Non Linear Models)

  • N. Kaldor
  • J Robinson
  • M. Kalecki
  • John Hicks
  • Roy Harrod

 

Post Keynesians

  • Evsey Domar
  • Hyman Minsky
  • Steve Keen
  • Marc Lavoie
  • Richard Werner
  • Perry Mehrling
  • Morris Copeland
  • Wynn Godley
  • Dirk Bezemer
  • Paul Davidson
  • Mark Setterfield
  • Steve Pressman
  • Basil Moore
  • Tom Palley
  • LP Rochon
  • L Randall Ray
  • Eckhard Hein
  • G C Harcourt
  • G Fontana
  • J King
  • AK Dutt
  • Stephanie Kelton
  • Scott Fullwiler
  • Lance Taylor
  • Geoffrey Hodgson
  • Alfred Eichner

     

Evolutionary School / Institutionalist School

(Increasing Returns/Circular and Cumulative Causation)

  • Karl Marx
  • R M Goodwin
  • J Schumpeter
  • Ken Boulding
  • T Veblen
  • Gunnar Myrdal

 

Complexity/Santa Fe

  • Scott Page
  • W Brian Arthur
  • Doyne Farmer

 

System Dynamics

  • John Sterman
  • Jay Forrester
  • Khalid Saeed
  • M Radzicki
  • K Yamaguchi
  • N Forrester
  • Tom Fiddaman
  • David Wheat
  • Peter Senge

 

Austrian Economics

  • F Hayak
  • Ludwig Von Mises
  • Murray Rothbard

 

 

Heterodox Growth Models

  • Kaldor
    • Dixen and Thirlwall
  • Kalecki
    • AK DUTT
    • Marglin
    • Rawthorn
  • Harris
  • Sweezy

 

Heterodox / Post Keynesian School – Ideas

  • Debt Deflation of Irving Fisher
  • Financial Stability Hypothesis of Hyman Minsky
  • Credit/Debt Cycles of Steve Keen
  • Stock Flow Consistent (Accounting) Models of Marc Lavoie and Wynn Godley
  • Joseph Schumpeter – Innovation/Creative Destruction
  • Richard Werner – Disaggregated Credit – Financial vs Real 
  • Perry Mehrling / Zoltan Pozsar – Money View
  • Morris Copeland – Flow of Funds
  • Austrian School – Hayak / Von Mises / Rothberg
  • Dirk Bezemer – Money as Credit / Accounting Models
  • Richard Koo – Balance sheet Recession
  • Quadruple Accounting / Interlocking Balance sheets
  • Asset Liability Matrix Analysis – K Tsujimura
  • Financial Social Accounting Matrix (F-SAM)
  • Monetary Circuit
  • Banks as Payment System
  • Banks as Market Makers (Dealers)
  • Liquidity – Solvency Nexus
  • Central Banks as Lender and Dealer of Last Resort
  • Focus on Disaggregated / Operational/Horizontal View of Banks and Central Banks and Financial Markets.

 

 

From Growth theory after Keynes, part I: the unfortunate suppression of the Harrod-Domar model

After Harrod and Domar independently developed a dynamic Keynesian circular flow model to illustrate the instability of a growing economy, mainstream economists quickly reduced their model to a supply side-only growth model, which they subsequently rejected as too simplistic and replaced with Solow’s neoclassical growth model. The rejection process of first diminishing the model and then replaced it with a neoclassical alternative was similar to how the full Keynesian macroeconomic paradigm was diminished into IS-LM analysis and then replaced by a simplistic neoclassical framework that largely ignored the demand side of the economy. Furthermore, subsequent work by mainstream economists has resulted in a logically inconsistent framework for analyzing economic growth; the popular endogenous growth models, which use Schumpeter’s concept of profit-driven creative destruction to explain the technological change that Solow left as exogenous, are not logically compatible with the Solow model.

 

From Institutional Economics, Post Keynesian Economics, and System Dynamics: Three Strands of a Heterodox Economics Braid

A. Lineage of Institutional Economics

In Figure 1, the intellectual lineage leading to the present-day school of institutional economics begins with Quesnay and Smith and follows two principal routes. The first runs through Ricardo and Marx and then through the “American institutionalists” Veblen, Commons, and Mitchell. The last link in this route passes through Clarence Ayres, Galbraith, and Myrdal. The second or “thermodynamics/general systems” route runs through Ricardo and Marx, passes through Schumpeter (1976), and links with Boulding (1970, 1978, 1991), Georgescu-Roegen (1971), and Robert Ayres (1978). This route has also been influenced by the cybernetics of Norbert Wiener (1948). Figure 1 also shows, via two-way arrows, four schools of thought that directly complement institutional economics: Post Keynesian economics, behavioral economics, ecological economics, and evolutionary economics. An argument can be made, however, that a two-way arrow between agent-based computational economics and institutional economics should be included as well.

 

B. Lineage of Post Keynesian Economics

Figure 1 presents one direct route and two main “directions of flow,” each incorporating several routes, that lead to the modern Post Keynesian school of economics. The direct route simply runs from Quesnay and Marx to Leontieff and then to the Post Keynesian school because input-output analysis is frequently used by Post Keynesian economists. On the other hand, the first main direction of flow runs through the Cambridge Post Keynesians (e.g., Robinson, Kaldor, Passinetti) and the founders of American Post Keynesian school (e.g., Weintraub, Davidson, Eichner, Minsky). This direction is traversed by way of Quesnay, Marx, and Kalecki or via Smith, Malthus, Keynes, Harrod, and Domar. The second main direction of flow runs through those economists who pioneered the “engineering systems” approach to economics such as Tustin (1953), Phillips (1950, 1954,1957), Allen (1955), Goodwin,10 and Leijonhufvud (1968).11 This direction is traversed via: (1) Keynes directly, (2) early Keynesian business cycle theorists such as Harrod, Hicks and Samuelson, (3) Hayek, because Post Keynesians such as Kaldor had their thinking influenced to some degree by Austrian economics, and (4) Schumpeter, because Goodwin both taught, and was taught by, Schumpeter [see Goodwin (1993, p. 305)].

 

C. Lineage of Ecological Economics

 

In Figure 1, the intellectual lineage leading to the present-day school of ecological economics begins with Quesnay and Smith and follows three principal routes. The first runs through Malthus and then directly to Costanza and Daly (1992). The second runs through Quesnay and then through Leontieff. The third runs through Ricardo and Marx and then passes through Schumpeter. In terms of complementary schools of thought, both evolutionary economics and institutional economics are linked to ecological economics with a two- way arrow. An argument can be made, however, that a two-way arrow between ecological economics and agent- based computational economics should be added because the emergence and evolution of social structures such as property rights and environmental valuations and norms, that are crucial to avoiding “tragedy of the commons” and other non-sustainable dynamics, can be identified and studied.

 

D.  Agent Based Computational Economics/Complexity/Santa Fe Institute

In Figure 1, there are several routes that lead to the present -day school of agent -based computational economics. The main route runs from John von Neumann and his work on self-replicating machines during the nineteen forties directly to the agent-based school; via John Nash and then Thomas Schelling [due to Schelling’s (1978) path-breaking agent-based work on the emergence of racially segregated neighborhoods]; or via some of von Neumann’s present-day followers such as John Holland [Holland and Miller (1991)], Stuart Koffman, John Miller (1998), W. Brian Arthur (1993, 1994), and Christopher Langton (1989).20 Leigh Tesfatsion (1997, 2000, 2001a, 2001b, 2002), Robert Axtell, Joshua Epstein, Robert Axelrod and David Lane (1993) would also be legitimately included in this group. Most of these modern day researchers have ties to the Santa Fe Institute, an organization specializing in the study of complex systems.21  One of the leaders of the Sante Fe Institute, W. Brian Arthur (1988, 1990), has written extensively about being influenced by economists who emphasized the importance of positive feedback loops, increasing returns, and path dependency, in explaining evolutionary economic behavior. As a result, in Figure 1 links to Arthur run from Nicholas Kaldor (1981), Gunnar Myrdal, Paul David (1985), and Ilya Progogine (1993).

 

E.  Lineage of Behavioral Economics

In Figure 1, the intellectual lineage leading to the present-day school of behavioral economics begins with Quesnay, Smith, and Ricardo and follows three principal routes. The first runs through Marx, to Dobb, Baran, Sweezy and Mandel, and then through some more modern-day radical political economists such as Sherman, Weiskopf, Bowles [Bowles, Ginits and Osborne (2001)], Foley (1997), and Marglin (1984). The second runs through Marx and then through Schumpeter, passes through Richard Day (1975) [see also Day and Eliasson (1986) and Day and Chen (1993)], and then through George Akerlof, Richard Thayler, and Robert Frank. The third runs through Veblen, Commons and Mitchell and then through Duesenberry and Simon (1957, 1979, 1984). It continues directly through Ackerlof, Thayler and Frank and also takes a side branch through Cyert and March (1963). This last route emphasizes the contributions to behavioral economics of the “Carnegie School” and the work of Herbert Simon. Indeed, Simon is considered to be the father of the field and frequently wrote that his thinking on bounded rationality was influenced by the work of John Commons [e.g., Simon (1979, p. 499; 1991, p. 87)].

 

F.  Lineage of Austrian Economics

In Figure 1, the intellectual lineage leading to the present-day school of Austrian economics begins with Quesnay, Smith and Ricardo and works its way to Carl Menger via Say and Mill. This route continues via Menger’s most prominent disciples Böhm-Bawerk and Wieser to Mises and then to his student Hayek.27 From Hayek, the route extends to the more modern-day Austrians such as Israel Kirzner (1987, 1997) and Murray Rothbard and finally to the school itself. A two-way arrow is shown between the Austrians and agent-based computational economics because many of Mises’ and Hayek’s beliefs are in harmony with central tenets of agent-based modeling. Indeed, Vriend (2002) lays out a strong case that Hayek was essentially an agent-based computational economist.

 

G.  Lineage of Evolutionary Economics

In Figure 1, the intellectual lineage leading to the present-day school of evolutionary economics begins with Quesnay and Smith and follows several routes. The first runs through both Marx and Schumpeter and then through economic historians such as David (1985) and Rostow (1990). The second runs through Schumpeter and the neo-Schumpeterians such as Nelson (1995), Winter (1964), Witt (1992, 1993), Iawi (1984a, 1984b), Eliasson, Silverberg (1988), and Dosi [and Nelson (1994)]. The third runs through Schumpeter and then the far-from-equilibrium thermodynamicists [Prigogine (1993), Nicolis, Allen (1988)] and the punctuated equilibrium theorists [Tushman and Romanelli (1985)], and finally through England (1994), who notes that he was inspired by Boulding (1970, 1978, 1991), Georgescu-Roegen (1971), and Prigogine (1993). The fourth runs through Schumpeter and the classical thermodynamicists [Georgescu-Roegen (1971), Ayres (1978)], and then through England (1994), or directly to the school. Two-way arrows indicating complementary schools of thought are drawn between all of the other evolutionary schools except the Austrians.

 

 

Key sources of Research:

 

A Contribution to Theory of Economic Growth

Robert Solow

1956

https://www.econ.nyu.edu/user/debraj/Courses/Readings/Solow.pdf

 

 

On the Concept of Optimal Economic Growth

T Coopmans

 

http://cowles.yale.edu/sites/default/files/files/pub/d01/d0163.pdf

 

Interactions between the Multiplier Analysis and the Principle of Acceleration

Paul A. Samuelson

The Review of Economics and Statistics
Vol. 21, No. 2 (May, 1939), pp. 75-78

 

 

ON THE MECHANICS OF ECONOMIC DEVELOPMENT

Robert E. LUCAS, Jr.

 

http://www.parisschoolofeconomics.eu/docs/darcillon-thibault/lucasmechanicseconomicgrowth.pdf

 

 

Increasing Returns and Long-Run Growth

Paul M. Romer

 

http://ihome.ust.hk/~dxie/OnlineMacro/romerjpe1986.pdf

 

 

‘Growth theory after Keynes, part I: the unfortunate suppression of the Harrod-Domar model’

Van den Berg, Hendrik

(2013)

The Journal of Philosophical Economics, VII:1

 

http://www.jpe.ro/pdf.php?id=4995

 

 

‘Growth theory after Keynes, part II: 75 years of obstruction by the mainstream economics culture’

Van den Berg, Hendrik

(2014)

The Journal of Philosophical Economics, VII:2

 

http://jpe.ro/pdf.php?id=6300

 

 

The Neoclassical Growth Model and Twentieth-Century Economics

Mauro Boianovsky and Kevin D. Hoover

http://public.econ.duke.edu/~kdh9/Source%20Materials/Research/Boianovsky-HooverIntroductionGrowth.pdf

 

 

TREVOR SWAN AND THE NEOCLASSICAL GROWTH MODEL

Robert W. Dimand and Barbara J. Spencer (née Swan)

 

http://www.nber.org/papers/w13950.pdf

 

 

The History of Macroeconomics from Keynes’s General Theory to the Present

Michel De Vroey and Pierre Malgrange

June 2011

 

http://sites.uclouvain.be/econ/DP/IRES/2011028.pdf

 

 

Keynes and the Cambridge School

G. C. Harcourt and Prue Kerr

 

https://historiadelamacroeconomia.wikispaces.com/file/view/Chapter22.pdf

 

 

NEW GROWTH THEORY, EFFECTIVE DEMAND, AND POST-KEYNESIAN DYNAMICS

Amitava Krishna Dutt

September 2001

 

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.463.871&rep=rep1&type=pdf

 

 

A Brief Introduction to Post Keynesian Macroeconomics

J. E. King

2013

 

http://wug.akwien.at/WUG_Archiv/2013_39_4/2013_39_4_0485.pdf

 

 

CONTEMPORARY ECONOMIC GROWTH MODELS AND THEORIES: A LITERATURE REVIEW

Ilkhom SHARIPOV

 

http://www.ceswp.uaic.ro/articles/CESWP2015_VII3_SHA.pdf

 

 

The structure of growth models: A comparative survey

Antonio D’Agata

Giuseppe Freni

 

http://growthconf.ec.unipi.it/papers/DAgataFreni.pdf

 

 

Major Schools of Economic Theory

 

http://www.tamut.edu/Walter-Casey/DOCUMENTS/CV-and-papers/Economic%20Theory.pdf

 

 

Getting rid of Keynes? A survey of the history of macroeconomics from Keynes to Lucas and beyond

 

Michel De Vroey

2010

 

https://www.nbb.be/doc/oc/repec/reswpp/wp187en.pdf

 

 

Neoclassical Growth Theory and Heterodox Growth Theory: Opportunities For and Obstacles To Greater Engagement

Mark Setterfield

December 2009

 

http://internet2.trincoll.edu/repec/WorkingPapers2009/wp09-01.pdf

 

 

Endogenous Growth: A Kaldorian Approach

Mark Setterfield

2010

 

https://pdfs.semanticscholar.org/bea6/c7a330e8859a2fd6bf09043e864ac71bbe92.pdf

 

 

Financialization in Kaleckian economies with and without labor constraints

Soon Ryoo and Peter Skotty

18th March 2008

 

https://www.umass.edu/economics/publications/2008-05.pdf

 

 

Post-Keynesian macroeconomics since the mid-1990s – main developments

Eckhard Hein

Working Paper, No. 75/2016

Institute for International Political Economy Berlin

 

 

Aggregate Demand, Aggregate Supply and Economic Growth

AMITAVA KRISHNA DUTT

2006

 

http://piketty.pse.ens.fr/files/Dutt2006.pdf

 

 

A dynamic synthesis of basic macroeconomic theory: implications for stabilization policy analysis

Forrester, N. B.

(1982).

(Doctoral dissertation, M. I. T., Alfred P. Sloan School of Management).

 

 

The System Dynamics National Model

Jay Forrester

http://systemsmodelbook.org/uploadedfile/1470_0a924c5b-b909-42fa-be9b-932588278f36_forre004.pdf

 

 

Understanding Recent Developments in Growth Theory

Lars Weber

 

https://www.systemdynamics.org/conferences/2007/proceed/papers/WEBER326.pdf

 

 

Linking Economic Modeling and System Dynamics: A Basic Model for Monetary Policy and Macroprudential Regulation

 

Klaus Dieter John

 

https://www.systemdynamics.org/conferences/2012/proceed/papers/P1396.pdf

 

 

System Dynamics and Its Contribution to Economics and Economic Modeling

M Radzicki

https://www.researchgate.net/publication/227167378_System_Dynamics_and_Its_Contribution_to_Economics_and_Economic_Modeling

 

 

Evolutionary Economics and System Dynamics

M Radzicki

J Sterman

http://www.systemdynamics.org/conferences/1993/proceed/radzi338.pdf

 

 

A Post Keynesian Model of Macroeconomic Growth, Instability, and Income Distribution

M Radzicki and K Saeed

http://www.systemdynamics.org/conferences/1993/proceed/saeed435.pdf

 

 

Institutional Economics, Post Keynesian Economics, and System Dynamics: Three Strands of a Heterodox Economics Braid

M Radzicki

2008

https://www.researchgate.net/publication/237138677_Institutional_Economics_Post_Keynesian_Economics_and_System_Dynamics_Three_Strands_of_a_Heterodox_Economics_Braid

 

 

Was Alfred Eichner a System Dynamicist?

M Radzicki

2006

https://www.researchgate.net/publication/239920399_Was_Alfred_Eichner_a_System_Dynamicist

 

 

Mr. Hamilton, Mr. Forrester and a Foundation for Evolutionary Economics

Michael J. Radzicki

2004

 

http://www.systemdynamics.org/conferences/2003/proceed/PAPERS/923.pdf

 

 

Disequilibrium Systems Representation of Growth Models—Harrod-Domar, Solow, Leontief, Minsky, and Why the U.S. Fed Opened the Discount Window to Money-Market Funds

Frederick Betz

 

http://file.scirp.org/pdf/ME_2015120814432915.pdf

 

 

An Institutional Dynamics Model of the Euro zone crisis: Greece as an Illustrative Example

Domen Zavrl
Miroljub Kljajić

2010

 

http://www.systemdynamics.org/conferences/2010/proceed/papers/P1144.pdf

 

 

“Deterministic chaos in an experimental economic system.”

Sterman, John D.

Journal of Economic Behavior & Organization 12.1 (1989): 1-28.

https://dspace.mit.edu/bitstream/handle/1721.1/47164/deterministicchax00ster.pdf?sequence=1

 

 

NONLINEAR MODE-INTERACTION IN THE MACROECONOMY

Erik MOSEKILDE, Erik REIMER LARSEN, John D. STERMAN

and Jesper SKOVHUS THOMSEN

1992

 

https://www.researchgate.net/profile/John_Sterman2/publication/225978240_Nonlinear_Mode-Interaction_in_the_Macroeconomy/links/5733372708ae298602dce4ba.pdf

 

 

Devil’s staircase and chaos from macroeconomic mode interaction

Larsen, Erik Reimer, et al.

Article in Journal of Economic Dynamics and Control ·

February 1993

 

https://www.researchgate.net/profile/Erik_Mosekilde/publication/4830250_Devil’s_staircase_and_chaos_from_macroeconomic_mode_interaction/links/5789dd4908ae59aa6676bfe6.pdf

 

 

Mode‐locking and entrainment of endogenous economic cycles.

Haxholdt, C., Kampmann, C., Mosekilde, E., & Sterman, J. D.

System Dynamics Review, 11(3), 177-198.

(1995).

https://dspace.mit.edu/bitstream/handle/1721.1/48535/modelockingentra00haxh.pdf?sequence=1