Sunday, October 28, 2018

Expansions Don't Die of Old Age

As the expansion ages, there's progressively more discussion of whether its advanced age makes it more likely to end. The answer is no. More formally, postwar U.S. expansion hazards are basically flat, in contrast to contraction hazards, which are sharply increasing. Of course the present expansion will eventually end, and it may even end soon, but its age it unrelated to its probability of ending.

All of this is very clear in Diebold, Rudebusch and Sichel (1992). See Figure 6.2 on p. 271. (Sorry for the poor photocopy quality.) The flat expansion hazard result has held up well (e.g., Rudebusch (2016)), and moreover it would only be strengthened by the current long expansion.

[I blogged on flat expansion hazards before, but the message bears repeating as the expansion continues to age.]