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Productivity Tracking ... New Progress

money.jpgI have been pretty preoccupied lately with thinking about global macroeconomic balances (here and here). Thinking often mean less linking in a blogging context so I thought I would do quick pointer here. Consequently, a lot of interesting things caught my eyes lately but nothing more so than a recent paper from the New York Fed about how to track productivity 'real time.' The paper was also duly noted by Mark Thoma and New Economist (hat tips). So what is the point here? Well how do we track the trend in productivity growth ... yes I know, this is not straightforward as also initially noted by the authors.

The difficulty in assessing the trend in productivity growth stems primarily from the extreme volatility of quarterly growth rates. In any one quarter, annualized growth rates in excess of 5 percent or below zero are common. Moreover, the volatility is not confined to short-term movements in this series; productivity growth also fluctuates with the business cycle, typically declining during a recession and rising sharply at the onset of a recovery.

Apparently, the unravelling of the trend in productivity requires that we look at real consumption and labour compensation as derivative variables of productivity itself.

'(...) specifically, we construct a statistical model that includes, in addition to productivity, two variables that economic theory predicts will move together with productivity over the long term: real (inflation-adjusted) consumption expenditure and real labor compensation. By looking at all three of these economic series at once, the model can more easily uncover the trend that underlies them all.'

The model used (regime-shifting model) is also described in detail ...

The regime-switching model, introduced in Hamilton’s (1988) study of nominal interest rates, has been applied to a number of economic and financial time series. The model is motivated by the observation that many variables go through periods in which their behavior changes dramatically. 


The regime-switching model is especially useful for our purposes because it will allow the common trend in productivity, real labor compensation, and real consumption expenditure to shift periodically between high-growth and low-growth states.

And the conclusion ...

Volatile short-term growth rates make the tracking of the trend in productivity difficult. But by looking at productivity in conjunction with labor compensation and consumption expenditure, one can discern the trend that is common to all three series. Our regime-switching model proves effective in tracking trend shifts in the postwar period—particularly the jump to trend productivity growth of nearly 3 percent that occurred sometime around 1997. 

Now, this is really interesting from a sort of field study point of view since it seems that this tool will allow us to pin-point the nature of productivity growth more closely. Furthermore, it should also crucially enable us to cut into the bone and track the shifts in productivity which are cyclical (i.e. unsustainable) and those which are structural; this I guess is the whole point of the study. I have, however, one caveat and it has to do with one of the author's variables - real labour compensation. I mean, have we not talked a lot about how the link between labour compensation (wage growth) and productivity has been somewhat broken, at least in a US context? This is also noted in the commentaries on Mark Thoma's post. I had something on it some time ago here on AS. Especially,  the two following studies have been widely noted ... I guess I am just a bit surprised over chart 2 in the New York Fed study, but I am perhaps missing something?

"Where did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income" Ian Dew-Becker and Robert Gordon; December 2005 

"The Evolution of top incomes: A historical and International perspective" Thomas Piketty and Emmanuel Saez; december 2005


Petro Peggers Getting Enough?

money.jpgGiven my recent obsession with global macroeconomic imbalances I cannot afford to let this one from the FT published a couple of days ago go unmissed.

Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements.

The revelation in the latest BIS quarterly review, published on Monday, confirms market speculation about a move out of dollars and could put new pressure on the ailing US currency.

Market liquidity is traditionally low in December, and many traders have locked in profits, potentially reinforcing volatility.

Russia and the members of the Organisation of the Petroleum Exporting Countries, the oil cartel, cut their dollar holdings from 67 per cent in the first quarter to 65 per cent in the second.

Meanwhile, they increased their holdings of euros from 20 to 22 per cent, the BIS said. The speed of the shift may help to explain the weakness of the dollar, which recently fell to a 20-month low against the euro and a 14-year low against sterling.

The BIS, the central bank for the developed world’s central banks, is customarily cautious in its language. However, it noted: “While the data are not comprehensive, they do appear to indicate a modest shift over the quarter in the US dollar share of reporting banks’ liabilities to oil exporting countries.”

So is this the beginning of the slide? Well, the thing to watch out for is whether the moves themselves are showing up in the Euro/Dollar value. I mean, of course they are to some extent but there is still an important point about which investors are doing the pushing here. If central banks in the Middle East and Asia seriously begin to move the reaction will be prompt and violent. However, let us not get carried away here and of course Brad Setser is also all over this ... Russia seems to be a key component in the somewhat misleading picture painted by the FT here.

(Brad Setser) 

I would be somewhat cautious though.   Russia tends to drive the BIS data on oil exporters, as it now accounts for the majority of the growth in oil state deposits in the international banking system.   It turns out that only $5b of the $16b increase in international bank deposits by Russian residents (including Russia's central bank) in q2 were in dollars.  But we already more or less know Russia diversified its (now very large) reserves in q2.

But more importantly is the point on whether the BIS data set is any good tracking petroexporters' reserve moves ...

But I wouldn't look to the BIS data for great insight into what other OPEC countries (Libya excepted) is doing with its money.   Why not?  I have spent a fair amout of time trying to track down OPEC's surplus in general, and the GCC's surplus in particular.   Rachel Ziemba and I will have a paper out on this soon.  The big countries in the Gulf simply don't have that much money on deposits in BIS reporting banks and they certainly aren't increasing their (net) deposits in BIS banks. 

However, we are hedging our bets here ...

The overall data -- and it admittedly is incomplete -- still suggests to me that central banks are buying a lot more dollars (and somewhat fewer euros) in 2006 than they did in 2005. 


Alas, all this data is stale.  The key question is whether central banks are currently supporting the dollar -- or whether they are currently adding to pressure on the dollar.  

I would bet that they are still supporting the dollar. But that is a guess. 

Watching the data is a key excercise here and no-one as far as I am concerned is better than Brad here ... when the Arabs buy one of Frankfurt's notes he will know :). On the other hand, the extent to which we are musing about whether the Asian and Middle Eastern CBs are supporting the dollar obviousy also hinges on their ability to support the Euro and the Yen. Remember there is a flipside here.