Regional President Speech

DATINGBUSINESSCYCLES PANEL DISCUSSION: DATING BUSINESS CYCLES JamesBullard* PresidentandCEO FederalReserveBankofSt. Louis 10thEABCNWorkshoponUncertaintyovertheBusinessCycle EuropeanCentralBank,Frankfurt March31,2009 AnyopinionsexpressedherearemineanddonotnecessarilyreflectthoseofotherFederalOpenMarketCommitteeemembers. DATINGBUSINESSCYCLES NBER DATING PROCESS Mitchell’sdissertation,1913.1 BurnsandMitchell,1946.2 Processdevelopedandputinplacewithoutbeinginformedby modernmacroeconomictheory. Theoryoffersguidanceaboutmorenaturalsummarymeasures ofeconomicperformance. Binarynatureisbothersomeandmaybeharmfulifitactsasan informationalsignal. 1.Mitchell,WesleyC.,BusinessCycles,1913. 2.Burns,ArthurF.,andWesleyC.Mitchell,MeasuringBusinessCycles,NationalBureauofEconomicResearch,NewYork,NY1946. DATINGBUSINESSCYCLES STATISTICAL MODELS: AUTOMATION WhydothisviajudgementcallbytheDatingCommittee? Statisticalmodelsexistanddoabetterjob. Everyonecanreplicatetherecessioncall. Thiswouldbeanimportantimprovement. DATINGBUSINESSCYCLES BINARY NATURE Throwsawayinformation—why? Simplesummaryofthestateoftheeconomyshouldbe continuous. Two-statenatureinfluencesresearchquestionsandanalysis. “Recession”isanartificialconstructionputting“special emphasis”oncertaintimeperiods. DATINGBUSINESSCYCLES BINARY SIGNALS AS HARMFUL SUMMARY STATISTICS Weknowexpectationsarecriticaltohowthemacroeconomy operates. Recessioncallisasignal—itcanactasacoordinatingdevice. Wewantfirmstoassesstheirownmarketsandprospectsfor earnings. Sendingasignalcansendfirmsinto“recessionstate.” Createsamplifiedandspuriouscyclicalpatternsineconomy. DATINGBUSINESSCYCLES EXAMPLE: LEARNING AND THE GREAT MODERATION* Regime-switchingshocks;two-stateMarkov. HouseholdsandfirmsmustinferstateviaBayesianinference. Confusionaboutstatesmoderatesbehavior. Clarityaboutstatesexacerbatesbehavior: “Soundingthesiren.” *Bullard,JamesandAartiSingh,"LearningandtheGreatModeration,"FederalReserveBankofSt.LouisWorkingPaper2007-027B,June 2007,RevisedMarch2009. DATINGBUSINESSCYCLES UNDEFINED LEVEL OF ACTIVITY FROM BURNS AND MITCHELL TheBurnsandMitchellideaofleavingthelevelofactivity undefinedismystifying. Theorygivesusguidanceaboutwhatwewouldliketo summarize. Theorysays:utility. Thiswouldsuggestanindexofconsumptionandleisure. Mostapproachestosummarizingtheeconomyhavesteadfastly avoidedleisuremeasures. But: considercomparisonsoftheU.S.andEuropeanworkplace. WWIIwasnotautility-raisingevent. DATINGBUSINESSCYCLES ZERO AS A BENCHMARK NUMBER Declinesinthelevelofactivityasdefiningevents. Thismakeslittlesensefromagrowththeoryperspective. Weexpecteconomiestogrowonaverage. Growthaveragesdifferacrosseconomies. Implies“recession”experiencesdifferacrosseconomiesbecause ofarbitrarydefinition. Moresensible“twostandarddeviationsbelownormal.” DATINGBUSINESSCYCLES HODRICK–PRESCOTT FILTERING AND RELATED METHODS Moreconsistentwithestablishedgrowththeory. Trendscanbetracked. Belowpar–aboveparperformancehalfthetime. Avoidsthealarmbellproblem. Controlsfordifferinggrowthratesacrosseconomies. DATINGBUSINESSCYCLES PROSPECTS FOR REFORM RecessiondatinghasbecomepartoftheAmericanpsyche. Ithasbeenhandedtousfromapre-moderntheoryera. Arguablyharmful. Easywaystoimprove: Statisticalmethodscouldautomatetheprocess. Tieclosertostandardtheoryforideasaboutwhattomeasure.

James Bullard (2009, March 30). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20090331_james_bullard

@misc{wtfs_regional_speeche_20090331_james_bullard,
  author = {James Bullard},
  title = {Regional President Speech},
  year = {2009},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20090331_james_bullard},
  note = {Retrieved via When the Fed Speaks corpus}
}