Relevant and even prescient commentary on news, politics and the economy.

Time for some not very big data biotech

It appears that the US government has separated mothers and their children and doesn’t know how to get them back together again. In particular, this is extremely difficult if the children are under 2 and don’t know their family name (looking for someone identified only as “mommy” or “mia madre” is challenging.

I think a data company with some need to apologize to the world can make itself useful. It is not too hard to match 3000 children who are too young to speak and their mothers provided the mothers eagerly cooperate.

DNA fingerprinting is possible. Maternity and paternity tests are possible. taking all 6000 or so DNA fingerprints and matching parents and children requires a few person days at most of programming then a millisecond of the processing power available to, say, Facebook.

The problem of getting addresses for matched pairs of parents and children has been solved long ago provided one has permission from the parents.

If it isn’t done, it’s because they don’t care.

uodate: good news from a firm which needs some good publicity and is, for whatever reason, doing the right thing. I applaud MyHeritage . They are offering free DNA tests to get families back together.

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Some thoughts on Nuclear Proliferation

I present myself as an expert here, but may be confused. You should probably stick to Wikipedia.

I’m not sure the centifuges in North Korea are all that important.

North Korea doesn’t use centrifuges to make bombs. Like almost everyone (all except Pakistan and the thin boy made by the US& UK & dropped on Nagasaki) they use a nuclear reactor to make Plutonium then extract it using ordinary chemical processes.

Similarly, the Iranian Arak reactor (once under construction & whose reactor vessel is now full of concrete –thanks Obama) was a much worse threat than their centrifuges.

The idea that enriching Uranium is about as easy as extracting Plutonium is deadly. It is the reason Bush ended the Agreed Framework which stopped N Korean Plutonium extraction (or at least the excuse). They had intelligence showign N Korea bought centfigues from Pakistan (which I am sure is much more reliable than the intelligence showing Iraq had WMD and an active Nuclear program and was assisting al Qaeda). This was, in his own word, the hammer John Bolton needed to smash the agreement.

Since then no-one has heard of those centrifuges (which snark aside I guess are in N Korea). After Bush abbrogated the Agreed Framework, N Korea extracted Uranium from spent fuel and made bombs.

The crucial threat is graphite (or I think heavy water) mediated nuclear reactors. The speed of Neutrons is crucial. If slow they are absorbed only by Uranium 235 (causing fission) if faster by Uranium 238 which becomes Plutonium 239. That is the fissile material in all US nuclear weapons (it is much easier to make than highly enriched Uranium 235 & one needs much less of it). If the neutrons go even faster, some are absorbed by Plutonium 239 making Plutonium 240. This is an odd one unlike any nuclide found in nature. It fissions just on its own (doesn’t need to be hit by another neutron). So the spontaneus fission of Plutonium 240 means that one can’t make a bomb of mixed Plutonium 239 & 240 as the neutrons released by the 240 cause pre-detonation of both the 240 and the 239.

Plutonium 240 is the reason that the Osiraq reactor (bombed by the Israelis) couldn’t be used to make bombs. That was clearly Saddam Hussein’s plan when he bought it from the French, but they tricked him making a reactor which made Plutonium 240. Since he couldn’t admit he was trying to make a bomb, they could pretend he wanted electricity and build a reactor which generated electricity but whose spent fuel could not be used to make bombs. All of this was explained to Begin (also I assume by the Israeli’s who make atomic bombs) who had the reacto bombed anyway (Abu Nidal Abu Smidal a reactor is a reactor).

The conflation of Uranium 235 (not used for bombs except as first used in reactors to make Plutonium 239) and Plutonium 239 (the stuff in all our bombs) has caused great trouble. It is related (as an excuse not the true cause) to Bush’s decision which lead to North Korea having nuclear weapons. It confuses people about the Iran deal (they look at the minor quickly reversible part not the key less reversible part). It means people believe aluminium* tubes are a reason to go to war (not close even if they weren’t rocket casings).

I will now google to check how many centrifuges are believed to be in North Korea (I see quite a few — I didn’t know that when I began typing)

* I will not type “Aluminum” without quotation marks until our tariffs are eliminated.

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Sanction Trump not Bourbon

This post “America’s allies should respond to steel tariffs with targeted sanctions on the Trump Organization” by Matthew Yglesias is brilliant (even though he is mainly agreeing with the prior brilliant article by Scott Gilmore “Trade sanctions against America won’t work. Sanctioning Trump himself might.”

The proposal is so brilliant and the case for it so clear, that, I think, each title is enough to convey the idea.

Yglesias elaborates while quoting another Canadian

In light of the unusual combination of geopolitical absurdity and delicacy that the situation poses, at a press conference last week, Canadian Prime Minister Justin Trudeau reached into the bag of rhetorical clichés we normally see American officials deploy against authoritarian regimes abroad:

I want to be clear on one point: Americans remain our partners, our allies, and our friends. The American people [are] not the target of today’s announcement. [skip]

While it’s a good speech, the reality is that Trudeau’s policy countermeasures are aimed at the American people, [skip]

A better path would be to take Trudeau’s analysis seriously — America’s allies should come together and retaliate against Trump rather than retaliating against the American people.

So why are they missing trump and hitting Harley’s and Bourbon ?

The argument of Gilmore and Yglesias is obviously correct. Not only would sanctions directed at Trump be effective, they would also be fair. Bourbon distillers and motorcycle workers bear no guilt, so it is unfair to punish them (also standard practice in trade wars but still unfair).

I’m afraid that what this really shows is that in the struggles among the powerful, the little people are pawns. Sanctions on Trump personally would cause pain to fewer people (I think a (modest) majority of US citizens woud actually be pleased). They would be vastly more effective, because Trump is totally egocentric. But they would be, and are perceived to be, a dangerous escalation.

Directing the punishment at innocent peons is a way of showing it is nothing personal (while saying it is personal). Just a normal policy debate.

Sanctions on Trump personally would be less extreme in that they would directly hurt fewer people, but they would be perceived as very extreme, because the person hurt is present at the G-7 meeting.

Sanctions on individuals are not part of normal trade conficts. There are sanctioned individuals, but they are not members of the club (many are Iranian some are Russian).

after the jump, I move on to a 2 tweet long philosophical digression (which focuses on what I imagine to be the topic of Yglesias’s senior thesis).

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Bring Back the Deutschmark

My plan for Europe. In comments JackD asked me what I thought of Italy leaving the Eurobloc. The problem is that it is easier said than done — the instant it becomes a serious possibility there will either be the mother of all bank runs or a banking holliday. Everyone (including your humble blogger) will want to get our hands on paper Euros which can’t be converted into Lire or Italos or whatever. So it has to be done quickly and by surprise — oh and the new currency has to be printed (quickly and secretly). Not going to happen. Even Greece stuck with the Euro in spite of absolutely appalling (unnecessary) costs.

On the other hand, Germany could leave the Euro bloc. Germans never liked the Euro anyway. I trust they would gladly wait for a chance to get Deutschmark’s again (actually German kids probably don’t remember the DM but they don’t have lots of money anyway).

I’m sure the DM would appreciate compared to the Euro. This would reduce Germany’s huge current account surplus and, therefore, also reduce Germany’s huge and very dangerous capital account deficit. As is, they are buying foreign assets or loaning to foreigners who, sometimes, pay them back. Germans recognize that this is a problem — they are close to obsessed.

Aside from the effect on employment, currency appreciation is fun — things get cheaper. Germany is really actually at roughly full employment. Their main problem is Putin no focus on economics is the rest of the world finances its current account deficit with Germany by borrowing from German institutions and German’s worry that Greece won’t be the last debtor to become insolvent.

I admit I want Germany out of the Euro bloc so they can’t impose austerity on other countries, but, the point is that they feel they have to do that to protext the assets which they accumulate due to the missalignment of the German Euro and the normal country Euro (that is the weirdly low price level in Germany).

On the other hand, uh I don’t see anything on my other hand. What’s the problem ?

We should re-Gauss Europe

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Investors Not Pleased With Italian Politicians

The extreme conflict between the establishment and the new natonal populist majority in Parliament has spooked investors. The difference between the Italian and German 10 year treasury rates just jumped up about 100 basis points.

This isn’t a crisis yet. I recall back when Italia caught a bit of Greek contagion (before ECB president Mario Draghi said “whatever it takes”) that the experts at the tesoro said they could handle interest rate spreads up to 7% (it got close back then)

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Carlo Cottarelli

Carlo Cottarelli was asked to try to form an Italian government by President Sergio Mattarella. There is no chance that Cottarelli will obtain the confidence of Parliament (parties including a majority of deputies have brought up the possibility of impeaching Mattarella for nominating Cottarelli).

Mattarella is using his extraordinary powers to fight populist nationalists who disrespected the Euro. Cottarelli is an odd choice for an anti-anti-globalist — he is currently a top official at the IMF. Nominating him is a declaration of absolute opposition to the current majority in Parliament.

My view is that the rise of populist nationalists in Europe is a terrible thing (not quite as bad yet as their taking power in the USA but getting there). I also think the blame mainly belongs to DG-EcFin and the Eurocrats who do not pretend to respect Democracy, who don’t see 11 % unemployment as relevant to macroeconomic policy making, and who are technically incompented technicians.

Being vain, I googled [waldmann stability and growth pact] to find out to what extent I could tell them I told them so. I found this worthwhile still relevant blog post by Roberto Tamborini. It denounces the application of the stability and growth pact and is well worth reading. But I was most struck by the references (which include the name Waldmann because Waldmann googled himself)

References

Cottarelli C. (2015), “Potential Growth Rates and the Working of SGP Fiscal
Rules”, Vox-EU, 2 March.

Fioramanti M., Waldamnn R. (2016), “The Stability and Growth Pact:
Econometrics and Its Consequences for Human Beings”, Vox-EU, 19 November.

It turns out that I agree entirely, completely, 100% with Carlo Cottarelli. He has been arguing against Brussels’s approach to austerity. He is much more able than I am to write for non-economists. He makes a very simple practical proposal which I entirely embrace — he says that structural unemployment not NAWRU should be used to calculate output gaps. This is actually very important. I am quite confident there is no counterargument based on econometrics or economic theory. It would have prevented the imposition of pro-cyclical fiscal policy. If they had listened to him, he might have been saved from the very unpleasant next few months.

But voters don’t know this, won’t learn, and wouldn’t care. The stability and growth pact NAWRU nuts have discredited Europe, the Euro, international organizations, economics, and time series econometrics. Italians won’t settle for demanding that output gaps be calculated with structural unemployment, after someone promised to demand that the European Central Bank fork over 250,000,000,000 Euros.

Good thing that insane devotion to austerity and a strong currency has never provoked really dangerous extremism in Europe.

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The Italian Crisis: La resa di Conte

(literally the surrender of Conte but a reference to The Big Gundown).

updated to comply with the Italian criminal code (which forbids vilifying the President of the Republic)

I have to write about Italian politics, because everyone is (and I live in Rome) but you don’t have to read it.

I will try one paragraph of background. In the last election angry Italians gave a very thin majority to two extremist parties the movimento 5 stell and La Lega Nord is a fairly far right party focused on expelling immigrants (I have a permesso di soggiorno so I’m not worried). It started as Northern separatist movement denouncing the central government. It has become nationalist, because racists will racist. The movimento 5 stelle is more exotic. They are very very angry about something but it isn’t clear what. The party was founded by a stand up comic and basically started as a blog (really). The two parties are very different in many ways, but both hate Eurocrats and reject austerity. They presented a program based on a flat tax and universal basic income (give all the money to the rich and the poor). They proposed that the European Central Bank pay for all this by giving Italy 250 billion Euros (this is not a joke, also don’t try this at home kids).

But the key stumbling block preventing implementation of this coherent reasonable program was that the Lega insisted on breaking with the past by nominating Paolo Savona, an 81 year old economist Minister of the Treasury. He has written that Europe should have a plan B which allows countries to stop using the Euro. This heresy was unacceptable Sergio Mattarella the President of the Republic who must nominate that cabinet (which must obtain the confidence of both houses of parliament). It is clear that Mattarella has the constitutional authority to refuse to nominate a minister. This veto power is rarely used and, in previous cases (eg Berlusconi trying to name his amazingly corrupt lawyer minister of justice) a compromise was reached. But the Lega & the 5 Selle are not the compromising types. Importantly, Mattarella does *not* have the authority to call early elections if there is a majority in parliament (which there is). Equally importantly, that just means he has to say he can’t find a majority and there will be early elections.

Mattarella decided to deal with the angry nationalists who must suspect him of undemocratic globalism by asking top IMF economist Carlo Cottarelli to form a caretaker government (you have got to be kidding me — next post (above) will be on Cottarelli, with whom I agree). Basically Italians will be asked to choose between austerity and obedience to unelected bureaucrats in Brussels, or semi-fascists, or the really crazy party. This is not an ideal situation.

The Quirinale (White House but much larger) explains Mattarella decision in a press release translated into English (although their English really reads as Eurenglish the English as a second language privileged by Eurocrats.

The key point is that the Euro is a core institution (like democracy, an independent judiciary and a free press ). Questioning the Euro is unacceptable to the President who is not supposed to meddle with policy, but to stick to protecting the fundamental institutions of the Republic (one of which turns out to be the Stability and Growth Pact).

IIRC the president of Portugal also refused to nominate a government with a majority because, he said, it was anti European Union. It’s almost enough to make me an anti-globalist.

There was, sadly, a long tradition of over-ruling parliamentary majorities which the alternative was to leave the gold standard. Somehow Europe has found its way back to the 20s and 30s. This time it probably won’t end so badly.

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Housing prices and recessions II

I wrote about how high house prices are correlaed with poor growth (partly because that which has gone up goes down). The data set was heroically collected by Jorda, Schularick, and Taylor who also used it for a paper which is actually very worth publishing (and published here).

They find that high housing prices and rapid growth of total credit are correlated with greater severity and duration of the next recession..

I wonder if the bubble and credit growth variables are useful in predicting the occurance of a recession (as well as the severity and duration once one comes).

I guessed that it is hard to predict turning points — in particular high asset prices & rapid expansion of credit may imply that there is trouble ahead, but not how far ahead. But I couldn’t resist a logit with dependent variable “recession” for your definition of recession — a decline in real GDP starting in year t. Also (guessing it would work better) I looked at recession3 which is a peak in the current year or one of the two following years and recession5 which is a peak in the current year or one of the four following years..

To my surprise, the variables work really quite well I think (not surprisingly better for recession3 and recession5).

for recession 3 (year to year decline starting in any of three years of real gdp

logit recession3 hpreal tloansgdp lrgdp year cn* if year>1945, cluster(ifs)

hpreal is the nominal price of housing /cpi, tloansgdp is total loans/gdp, lrgdp is ln(rgdp per capita), there are country dummies

or just for recession (real gdo decline current year to next)

. logit recession hpreal tloansgdp lrgdp year cn* if year>1945, cluster(ifs)

And with recession5

It works a little bit better if hpreal is filtered with a Hodrick Prescott filter (smoothing parameter from 100 to 4000 makes not so much difference) and the stationary part used in the regressions.

The index (x beta from the logit) makes it possible to classify years as preceeding recessions or not (again better for recession in next 3 years and better still recession in next 5 years).

The AUC (area under the curve) statistic gets as high as 0.8 for filtered hpreal (smoothing 1600) and recession5 — 0.5 is the expected value if the classification is random (if the index is worthless) and 1 means perfect classification.

This is the star peforming correct classification frontier from
logit recession5 hpreal_1 tloansgdp lrgdp year cn* if ok, cluster(ifs)

The area under the curve is the statistic called AUC and, in this case is equal to 0.8025378

Correct classification frontier was a new concept for me (it seems that doctors talk about it a lot). It is generated by starting with a very low cutoff A and saying a recession will come if xbeta>A then moving up the cutoff A. So for very low A all recessions are called so correctly classified, but all years not followed by a recession in 5 years are miss classifiied. As A slides up to infinity it goes to all non recessions are correctly classified and no recessions are correctly classified.

The curve shows that a value so that half of recessions are predicted, only 10% of years not followed (within 5 years) by a recession are false alarms.

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Comment on CEPR Policy Insight 91 section 4.2.1

Sorry for the title which is pure click bait.

I would like to discuss a reform of the Stability and Growth Pact proposed by Agnès Bénassy-Quéré Markus Brunnermeier, Henrik Enderlein, Emmanuel Farhi, Marcel Fratzscher, Clemens Fuest, Pierre-Olivier Gourinchas, Philippe Martin, Jean Pisani-Ferry, Hélène Rey, Isabel Schnabel, Nicolas Véron, Beatrice Weder di Mauro, and Jeromin Zettelmeyer in CEPR Policy Insight 91 “Reconciling risk sharing with marketdiscipline: A constructive approach to euro area reform” (pdf warning). This is just one section of the proposal (4.2.1) and it is the one related to some of my own research.

Vox EU has a good executive summary of the proposal. I quote the relevant passage (I will add details from the long detailed proposal especially on points which were not clear to me from the summary)

Martin Sandbu likes the proposal.

Second, replacing the current system of fiscal rules focused on the ‘structural deficit’ by a simple expenditure rule guided by a long-term debt reduction target. The present rules both lack flexibility in bad times and teeth in good times. They are also complex and hard to enforce, exposing the European Commission to criticism from both sides. They should be replaced by the principle that government expenditure must not grow faster than long-term nominal output, and should grow at a slower pace in countries that need to reduce their debt-to-GDP ratios. A rule of this type is both less error-prone than the present rules and more effective in stabilising economic cycles, since cyclical changes in revenue do not need to be offset by changes in expenditure.

Monitoring compliance with the fiscal rule should be devolved to independent national fiscal watchdogs, supervised by an independent euro area-level institution, as elaborated below. Governments that violate the rule would be required to finance excess spending using junior (‘accountability’) bonds whose maturity would be automatically extended in the event of an ESM programme (the status of the existing debt stock would remain unaffected). The real-time market pressure associated with the need to issue such bonds would be far more credible than the present threats of fines, which have never been enforced. And the cost at which these junior sovereign bonds are issued will depend on the credibility of government policies to tackle fiscal problems in the future.

To summarize more, the proposal is to focus more on expenditure and less on deficits and to enforce the rules through the junior status of bonds issued above the allowed amount. The second aspect of the proposal is more interesting and I have an (even) more favorable view of it, but I will focus on the first for most of this post.

The starting point is that the current adjustments used to calculate structural budget balance are not transparent, are controversial and according to the authors (and others including me) are just incorrect so the rules as applied force pro-cyclical fiscal policy. I have two problems with the proposal “that government expenditure must not grow faster than long-term nominal output” as stated in the executive summary. First it appears to be simply assumed that changes in government revenue are all cyclical — That Ronaldo Reagano will not be elected head of any European government. Second it is assumed that calculation of “long-term nominal output” is transparent, uncontroversial and won’t force spending cuts during recessions.

Some of my distress is relieved when I read the actual proposal.

4 Nominal expenditures are calculated net of interest payments, of unemployment spending (except when these are due to discretionary changes to unemployment benefits), and of the estimated impact of any new discretionary revenue measures (changes in tax rates and tax bases). The first two adjustments allow for more counter-cyclicality, while excluding the effect of expenditure-increasing structural measures. The last adjustment is meant to preclude the manipulation of tax rules (for example, tax cuts ahead of an election) that are not compensated by offsetting expenditure measures.

The nominal spending ceiling thus becomes a new formula for structural budget balance. The cyclical adjustments are remove changes due to changes in interest payments, unemployment spending (except when these are due to discretionary changes …) and tax revenue changes (except for those due to changes in the tax code).

The proposed system is at least as opaque as the SGP, the non-transparent part of the current process is the estimation of potential output. This must still be estimated in order to forecast normal nominal GDP growth (which, as they explain, is real potential GDP growth + 2%).

The actual application of the proposal would require and agreed definition of “unemployment spending”. Is this unemployment insurance or unemployment insurance plus unemployment assistance ? How does one correct for a change whose impact will increase as the population ages ? Netting out the effect of discretionary “changes” requires a baseline from which to estimate the change — an increase in duration of benefits can have a tiny effect the year it is introduced and a large effect later — is the effect on current spending of a 3 year old reform an increase “due to discretionary changes”.

To net out the effects of discretionary changes in unemployment benefits, one would need to estimate the effect of such changes, would increasing the replacement ratio to 110% have an effect on unemployment duration ? How about “new discretionary tax measures”, what if Arthur Lafferbaud were to assert that reduced tax rates caused increased revenue, so the correction for the effects of changes in the tax code would be to allow more spending if taxes were cut ? The effects of unemployment benefits and taxes on expenditures and revenue are exceedingly controversial. The controversies would have to be resolved for the plan to be implemented.

I think it is more practical to admit that the proposal is a new estimate of structural deficits and subtract a guess of the effect of the cycle on revenues and unemployment spending. I guess one might give fiscal authorities the right to appeal that there is no plausible discretionary change which could have caused a decline in revenue or an increase in unemployment spending, but I don’t like a rule where the key clauses are in parentheses and begin with the word “except”.

I think the real difference between the proposal and the current SGP rules is hidden in the phrase “grow … long-term nominal output (that is, the sum of potential output growth and expected inflation)”. This implies that the potential output is estimated as part of forecasts of output in the distant future. In the current approach, completely different time series models of potential output are used for medium term forecasts and for cyclical corrections. The potential output used for cyclical corrections is markedly pro-cylical which implies small cyclical corrections and a demand for procyclical fiscal policy. I think the problem would be resolved if it were required that “potential output” be given one definition and models which imply a high probability that the natural rate of unemployment will be negative in the not too distant future are ruled out (they are currently used to attempt to dictate fiscal policy).

On the other hand, it might be better diplomacy to propose an entirely new approach which is really mainly new because it doesn’t allow such models than to say that the old calculations are just incorrect and the application of the SGP has been nonsensical.

OK now the more interesting part. I do like the proposal for accountability bonds. It is enforceable — owners of regular bonds have standing to sue if a state attempts to even partially default on regular bonds while also paying something to owners of accountability bonds. My only concern is that I am pretty sure that the new rule would amount to a pretty much absolute ceiling on Italian public spending. I’m not buying and accountability BTPs from the Italian Treasury and I doubt many other people would be eager to buy them. That is, my problem with an actually effective enforcement mechanism is that, given the effects of fiscal rules so far, I don’t want them to be enforced effectively.

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The Relative Price of Housing and Subsequent GDP growth in 17 Developed Countries

In The USA, there is a striking negative correlation between the relative price of housing and GDP growth over the following 5 years Given this simple correlation, it is possible to forecast the great recession using just that variable and a trend. In fact, the forecast recession is even more severe than the actual recession. This note examines other developed countries using the data set assembled by Oscar Jordà, Moritz Schularick and Alan Taylor which includes annual series for the nominal price of housing for 17 developed countries. For 13 of these countries, there is a strong negative association between the relative price of housing and real GDP growth ove the following 5 years. An excellent fit of the time series of GDP growth can be obtained using only three variables. Out of sample forecasts are fairly useful – better than many medium term out of sample forecasts, but with markedly larger residuals than the within sample fit.

First a simple fixed effects regression for the 17 countries:Australia, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, UK and the USA

Hpreal is the ratio of the housing price index to the consumer price index, rgdpg5 is the growth of log real GDP per capita over the following 5 years. The disturbances are clearly not independent over time as the dependent variable is a moving average of growth over 5 years. Standard errors are calculated allowing correlation of disturbances for the same country using the cluster() option. This regression suggests a pattern worth exploring. The t-like statistic definitely does not have a t-distrubution under the null, because the two series are not stationary. Also 17 is not a large number of clusters.
Now as a next step, I exclude the World War II years and add two extremely important growth related variables, lrgdp which is the log of real gdp per capita and an exponential trend which captures at least some of the change in technology. As is very well known, there is strong evidence of convergence towards this trend for these developed countries. The coefficient on the relative price of housing increases markedly in magnitude.

Most of the rest of this note focuses on post World War II data. A hint of an explanation of the pattern is obtained by regressing the growth in the natural log of the relative price of housing over the 5 year interval lhprealg5.

There is fairly strong evidence of regression of relative price of housing towards the trend. This suggests that high house prices imply a decline in house prices which can cause a decline in aggregate demand through reduced residential investment, reduced home equity and (in recent decades) reduced access to home equity loans. In fact, the coefficient of 5 year GDP growth is reduced by half and becomes statistically insignificantly different from zero if lhprealg5 is included in the regression.

This isn’t the whole story however, if pre world war II data are also included, the coefficient on hpreal remains strongly significant.
The panel regressions impose identical coefficients including a common exponential trend. Perhaps as a result, they give extremely poor out of sample forecasts. It is also necessary to allow coefficients to vary from country to country to see whether the pattern is robust or driven by a few extreme cases.
Country by country, the post WWII simple correlations of hpreal and rgdgp5 are all negative

This may simply reflect the fact that per capital real GDP growth rates have declined and the relative price of housing has increased. Separate regressions analogous to the panel regressions reported above are reported below. Standard errors are calculated assuming moving average disturbances, since the dependent variable is a moving average.

Figure 1 shows the fitted values for 5 year per capital real GDP growth (prgdpg5) and the actual series (rgdpg5). For the countries with small (or positive) coefficients on hpreal, Australia, France,Germany, and Switzerland, the fitted values are close to declining trends corresponding to generally slowing growth. For Denmark, Spain, Finland, Great Britain, Italy, Japan, the Netherlands, Norway, The UK and The USA, the fitted series strikingly matches fluctutations. Belgium, Canada and Sweden are intermediate cases.

In general the fit is striking. It is not easy to forecast GD P growth over five year intervals and quite unusual to match it so well using only three explanatory variables one of which is a trend.

I explore out of sample forecasting performance and draw conclusions after the jump

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