Friday, May 20, 2016

Hazard Functions for U.S. Expansions

Glenn Rudebusch has a very nice 2016 FRBSF Letter, "Will the Economic Recovery Die of Old Age?".  He draws on perspective and results from our joint work of 25 years ago (including a paper we did with Dan Sichel -- see below), and he applies them to the present expansion.  He correctly emphasizes that U.S. expansion hazard functions are basically flat, so "old" expansions are no more likely to end than "young" ones. That's of some comfort, since the present expansion, which started in mid-2009, is getting long in the tooth!

Actually, the flat expansion hazard is only for post-WWII expansions; the prewar expansion hazard is sharply increasing. Here's how they compare (copied from Glenn's FRBSFLetter):


Probability of an Expansion ending within a month
Probability of a recovery ending within a month

Perhaps the massive difference is due to "good policy", that is, post-war policy success in "keeping expansions alive".  Or perhaps it's just "good luck" -- but it's so big and systematic that luck alone seems an unlikely explanation.

For more on all this, and to see the equally-fascinating and very different results for recession hazards, see Diebold, Rudebusch and Sichel (1992), which I consider to be the best statement of our work in the area.

[Footnote:  I wrote this post about three days ago, intending to release it next week. I just learned that The Economist (May 21st issue) also reports on the Rudebusch FRBSF Letter (see http://www.economist.com/news/finance-and-economics/21699124-when-periods-economic-growth-come-end-old-age-rarely-blame-murder), so I'm releasing it early.  Interesting that both The Economist and I are not only slow -- Glenn sent me his Letter in February, when it was published! -- but also identically slow.]