By Analytical Services Division on November 29th, 2011
In our new quarterly forecast, we draw on the work pioneered by recent Nobel Laureate
Christopher Sims to forecast the economy with a proprietary Bayesian Vector
Auto Regression model (the Loop BVAR Model). The model is agnostic with respect
to economic ideology, parsimonious, and focused on “getting the numbers
right.”
The road to recovery following the 'Great Recession' has appeared at times to be 'plodding' along, but compared to the 2001 recession, the economy appears to have bounced back at least as fast in several key variables.
This month’s Model output generally follows the consensus storyline on the economy:
the continuation of subpar growth with no ‘double dip”
constrained income growth
slow progress on unemployment
modest industrial production growth
The Model deviates from conventional wisdom in two interesting respects:
The Model anticipates that the Fed will maintain its pledge to keep fed funds at close to zero for too long; and
The Model output suggests that the deflation threat marginally increases over the next five quarters.
The implicit reconciling assumption is that slow growth is sustainable, but vulnerable, and prices and wages will remain under pressure. The Fed is expected to move towards a zero real funds rate (target fed funds minus inflation) by early 2013 from its highly accommodative stance at present.
We continue to see modest growth in the 2% range over the forecast period. The 10-year Treasury note yield is expected to rise modestly over the period, but maintain a trading range of 1.75% to 3.00%. A reversal of the flight to quality would add roughly 75 to 100 basis points to the current 10-year yield level, according to our estimations. We expect risk levels to remain elevated for the time being, however.
"Use assumptions drawn from 'theory’, which actually means intuition in most cases, as lightly as possible {emphasis added}"
~from Arthur J. Rolnick’s “An Interview with Christopher Sims,” published June 1, 2007.
In our new quarterly forecast, we draw on the work pioneered by recent Nobel Laureate Christopher Sims to forecast the economy with a proprietary Bayesian Vector Auto Regression model (the Loop BVAR Model). The model is agnostic with respect to economic ideology, parsimonious, and focused on “getting the numbers right.”
Loop Capital Economics Quarterly Forecast Q4 2011 (PDF) »
This month’s Model output generally follows the consensus storyline on the economy:
The Model deviates from conventional wisdom in two interesting respects:
The implicit reconciling assumption is that slow growth is sustainable, but vulnerable, and prices and wages will remain under pressure. The Fed is expected to move towards a zero real funds rate (target fed funds minus inflation) by early 2013 from its highly accommodative stance at present.
We continue to see modest growth in the 2% range over the forecast period. The 10-year Treasury note yield is expected to rise modestly over the period, but maintain a trading range of 1.75% to 3.00%. A reversal of the flight to quality would add roughly 75 to 100 basis points to the current 10-year yield level, according to our estimations. We expect risk levels to remain elevated for the time being, however.
~from Arthur J. Rolnick’s “An Interview with Christopher Sims,” published June 1, 2007.