Working Paper: CEPR ID: DP2906
Authors: John Muellbauer; Luca Nunziata
Abstract: We derive a comprehensive one-year ahead forecasting model of US per capita GDP for 1955-2000, collectively examining variables usually considered singly, e.g. interest rates, credit conditions, the stock market, oil prices and the yield gap, of which all, except the last, are found to matter. The credit conditions index is measured in the Federal Reserve?s Survey of Senior Loan Officers and its importance is consistent with a ?financial accelerator? view. The balance of payments, exchange rate and fiscal policy also play a role. We address the Lucas critique, investigating consequences of monetary policy regime shifts in 1980, and fiscal policy regime shifts at the end of the 1980?s. The model forecasts in 2001 the most severe growth reversal since 1974.
Keywords: Lucas critique; macroeconomic forecasts; monetary policy transmission; oil prices; the credit channel; the financial accelerator; US recession
JEL Codes: E32; E37; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Credit conditions (G21) | GDP growth (O49) |
| Tighter credit conditions (E51) | Reduced consumer spending (D12) |
| Reduced consumer spending (D12) | GDP growth (O49) |
| Real stock market price index (G12) | GDP growth (O49) |
| Rising stock prices (G19) | Increased consumer spending (D12) |
| Higher oil prices (Q31) | GDP growth (O49) |
| Higher oil prices (Q31) | Higher production costs (D24) |
| Higher production costs (D24) | Reduced consumer purchasing power (D12) |
| Fiscal policy feedback rule shift (E62) | GDP growth (O49) |
| Trade deficit to GDP ratio (F14) | GDP growth (O49) |
| Record high trade deficit (F14) | Growth prospects (E66) |