Friday, May 6, 2011

GDP for the First Quarter

The preliminary GDP figures for the first quarter have arrived. With a growth rate of 3.61 percent, money expenditures continue to fall further behind the trend growth path of the Great Moderation. However, they do make very slight progress in moving towards my preferred adjusted noninflationary growth path. (GDP is nominal GDP, Real GDP is GDP corrected for inflation.)

GDP is currently at just more than $15 trillion. If GDP had continued on its growth path of the Great Moderation (defined here from the first quarter of 1984 until the fourth quarter of 2007,) then the current value would be approximately $17.3 trillion. GDP is currently 13.6 percent below that trend growth path, and that gap has continued to grow. The target for that growth path in the first quarter of 2012 is approximately $18.4 trillion. To reach that target, the growth rate from the first quarter 2011 to the first quarter 2012 would need to be 21 percent.

My preferred modified target involves moving to a slower, 3 percent growth path starting in the second quarter of 2007. The current value of that target growth path is approximately $15.7 trillion. GDP remains 4.3 percent below target. The target for the first quarter of 2012 would be approximately $16.2 trillion. To reach that growth path over the next year, the growth rate from the first quarter of 2011 to the first quarter of 2012 would need to be 7.6 percent (not unusual for strong recoveries, such as in the early eighties.) Of course, once the growth path is reached, the growth rate would then be three percent.


  1. It seems like you are arbitrarily picking the "right" level of NGDP based on either a long-lost trend or your preferred trend, ceteris paribus. But shouldn't the right level be the level at which there is no excess demand for money? Plainly that level doesn't exist abstractly, since current NGDP alone isn't determinative, but that's the whole point. It might be that your 3%-from-2007 target is sufficient or it might be that this results in a quasi-equilibrium with a persistent excess demand for money and an output gap. We might reach that level and believe that there is still an excess demand for money. Whether you choose 3% or 5% is a relatively minor matter once you're back near full equilibrium, but talking in those terms (what the right level current NGDP ought to be) when you're well into a quasi-equilibrium with an excess demand for money doesn't seem too useful. Admittedly, it might have been useful immediately after the initial drop when you could assume reverting to the previous trend would be curative, but at this point it seems a little capricious.

  2. i think dlr raises an interesting question. I hve wondered about it myself: at what point is it better for a central bank to accept a new expectations equilibrium for the growth path of gdp, instead of trying to get onto the old expected growth path? and, more interestingly to me, how does one go about to determine the answer to this question?

  3. There are actually benefits to the 3% from 2007 growth path, but those are based on the current price level and standard estimate of the output gap. The reason to have money expenditures growth path targeting is to get away from worrying about either of those things. (I will look at them again and post on it when I get a chance.)

    Adjusting the quantity of money to the nominal demand for money is problematic because the price level impacts the nominal demand for money. I believe the monetary order needs to be tied down by fixing some nominal quantity somehow.

    I agree that at some point, "rebasing" is the only answer. Obviously, I am proposing some rebasing (and disinflation) from the 1984-2007 trend of GDP growth.

  4. I don’t think too many people can say it’s entirely bad but obviously everyone expect more and the reason is obvious too, but nothing can be perfect or within our expectations. I just like to go ahead on my way and make sure I trade with simple and straight forward approach. I find it extremely easier with the solid features and facilities present having lowest possible spread from 0.1 pips to high leverage up to 1.500 and much more, it’s all so easy!