29 December 2011

Japan Stagnation Myth?

I came across this piece on The Atlantic website by Eamonn Fingleton arguing that Japan's two decade long stagnation is largely a myth. I'm not willing, just yet, to completely go along with his thesis that this myth has been stoked by the Japanese Government to ease political pressure on their export-oriented economic model. (It would certainly be interesting if it were true. It is definitely the case that Japanese companies have become adept at dealing with potential US political pressure, e.g. assembling cars in the US.)

However, as a semi-regular visitor to Japan I do find it hard to completely believe the stagnation story. The place just seems so clean and vibrant. If Japan is stagnating, then American cities like Detroit would do well to 'stagnate' also.

Anyways, beyond the interesting stats on Japanese trade growth and the improvement in living standards since the 1980s in Eamonn's piece, I've been sceptical of the stagnation story based on official GDP numbers (he actually thinks these are underestimates, but let's leave that issue aside for the moment). If we control for stagnate Japanese population growth by looking at GDP growth per capita as opposed to overall GDP growth we can see that Japan's growth numbers aren't that different from the US's (the usual country comparison in the stagnation stories).

Look at this graph using data from the World Bank:

It shows the difference between Japanese and US annual overall GDP growth and per capita growth. Negative number indicate that the US grew more than Japan and vice versa. 0 means that GDP growth is the same for both countries.

The key stagnation period to look at is from around 2000 to the present. Japan was supposedly stagnating while the US was booming. If we just look at overall GDP growth Japan did grow more slowly than the US. But if we look at growth on a per capita basis, there is basically no difference. Apart from 2009, Japan has basically done at least as well as the US since the end of the Asian financial crisis.

Here is the R code to reproduce the graph:

27 December 2011

Unofficial LSE LaTeX Beamer Theme

I was getting pretty tired of the usual LaTeX Beamer presentation themes (see here for examples). So I decided to create an (unofficial) LaTeX Beamer theme for the LSE.

It is based on the BerlinFU theme and Seth Brown's Bunsen theme.

It's still very much a prototype (the style files need significant cleaning up). But the theme does produce decent presentations (see here for an example). You can find the theme on GitHub here.

Please feel free to improve or fork it.

Update 11 January 2012: Here is a full example of the theme in action:

22 December 2011

Partisan Bias in Fed Inflation Forecasts?

Following on from my previous post about US Federal Reserve inflation forecast errors, I decided to put together a descriptive graph to see if there might be a partisan bias to these forecast erros. Also, given all of the work in the political economy on political business cycles, I wanted to see if forecast errors changed around elections. (See the previous post for what I mean by Fed inflation forecast error.)  

So, I have two questions:

  1. Have Fed inflation forecast errors been different during Democratic and Republican presidencies?
  2. Are Fed inflation forecast errors different for election periods and non-election periods?

To answer these questions, I simply made a graph using the same inflation forecast error data as before, but arranged in terms of quarters before a US presidential election (quarters with elections are coded 0). I then coloured the inflation errors by the sitting president's party. Finally, I used R's ggplot2 loess function to summarise and compare the errors made during Democratic and Republican presidencies.

Question 1: The Fed did tend to overestimate inflation during Democratic presidencies and underestimate it during Republican presidencies (an Error/Actual score of 0 means that the forecasters perfectly predicted actual inflation). Admittedly we have a pretty small sample of Democratic presidencies (only Carter and Clinton), but it is striking how all of the big underestimates were during Republican presidencies and almost all of the big overestimates were when Democrats had power.

Maybe, Federal Reserve staff anticipate--to an incorrect degree--that Democratic presidents will pursue expansionary policies and vice versa.

Question 2: It is not as clear that forecasts systematically differ in election periods as opposed to non-election periods. Though the spread of the errors across parties does shrink very close to the election. I wonder why this might be?

More to come . . .

The R code to reproduce the plot is:

12 December 2011

Federal Reserve Internal Inflation Forecast Error

I'm putting together some descriptive statistics for a project (with Cassie Grafstrom) on the forecast errors that Federal Reserve staff make. Is there anything systematic about it?

Our forecast data are from the Fed's Green Book, which is produced before each FOMC meeting. I've created a graph of quarterly forecast errors (simply Forecasts Made 2 Quarters in Advance - Actual Inflation from the Federal Reserves FRED database. Also, forecasts are compared to GNP/GDP deflators and chain-type price indexes, based on changes in what inflation indicators the forecasts are trying to measure across time).

From this graph it seems like the Fed has gotten much better at forecasting inflation two quarters out. However, this is a bit misleading since the absolute level of inflation varies considerably over this time span. In the early part we have the stagflation period with high inflation. Then from the start of the Volker Fed in 1979 absolute inflation decreased. To deal with this problem I simply standardised the errors by making them a proportion of absolute inflation.

We get a much different picture from looking at the second graph. Some thoughts from eyeballing:
  • The Fed tended to underestimate inflation in the 1970s
  • It was then more likely to over estimate than underestimate until around 2000.
  • From around 2000 it tended to drastically underestimate inflation.
The first two observations correspond to what Capistrán (2008) found. However his data didn't go past the late 1990s. The last observation is fairly interesting since it coincides with a period of the Fed steadily lowering the Fed Funds Rate.

More work to follow . . .