News, Noise, and Estimates of the "True" Unobserved State of the Economy

Which provides a better estimates of the growth rate of “true” U.S. output, gross domestic product (GDP) or gross domestic income (GDI)? Past work has assumed the idiosyncratic variation in each estimate is pure noise, taking greater variability to imply lower reliability. We develop models that relax this assumption, allowing the idiosyncratic variation in the estimates to be partly or pure news; then greater variability may imply higher information content and greater reliability. Based on evidence from revisions, we reject the pure noise assumption for GDI growth, and our results favor placing sizable weight on GDI growth because of its relatively large idiosyncratic variability. This calls into question the suitability of the pure noise assumption in other contexts, including dynamic factor models.

The Income- and Expenditure-Side Estimates of U.S. Output Growth

macroeconomics, income, expenditure, output growth, GDI, GDP, business cycle

On the Gains to International Trade in Risky Financial Assets

This paper develops and implements a framework for quantifying the gains to international trade in risky financial assets. The framework can handle may agents, many assets, incomplete markets and limited participation in asset markets. It delivers closed-form analytic solutions for consumption, portfolio allocations, asset prices and the gains to trade. We find enormous gains to trade when asset returns are calibrated to observed risk premia and all agents participate in asset markets. The gains-to-trade puzzle is closely related to, but distinct from, the equity premium puzzle. High risk aversion merely alters the form of the gains-to-trade puzzle, but limited participation in asset markets goes a long way towards addressing both puzzles. We also identify three reasons for limited international risk sharing. First, the requirement that asset markets span the space of national output shocks fails in a serious way. Second, for many countries the cost of using financial assets to hedge national output shocks greatly exceeds the benefits. Third, limited asset market participation reduces the feasible gains from international risk sharing.

The income- and expenditure-side estimates of U.S. output growth

The U.S. produces two conceptually identical official measures of its economic output, currently called Gross Domestic Product (GDP) and Gross Domestic Income (GDI). These two measures have shown markedly different business cycle fluctuations over the past twenty-five years, with GDI showing a more-pronounced cycle than GDP. Thegoal ofthispaperistodeterminewhichmeasurebetterreflects thebusiness cycle fluctuations in true output growth, and a broad range of results favor GDI. GDI currently shows the 2007-2009 downturn was considerably worse than is reflected in GDP. JEL classification: C1, C82

Estimating probabilities of recession in real time using GDP and GDI

This work estimates Markov switching models on real time data and shows that the growth rate of gross domestic income (GDI), deflated by the GDP deflator, has done a better job recognizing the start of recessions than has the growth rate of real GDP. This result suggests that placing an increased focus on GDI may be useful in assessing the current state of the economy. In addition, the paper shows that the definition of a low-growth phase in the Markov switching models has changed over the past couple of decades. The models increasingly define this phase as an extended period of around zero rather than negative growth, diverging somewhat from the traditional definition of a recession.Gross domestic product ; Recessions ; Econometric models

Lack of signal error (LoSE) and implications for OLS regression: measurement error for macro data

This paper proposes a simple generalization of the classical measurement error model, introducing new measurement errors that subtract signal from the true variable of interest, in addition to the usual classical measurement errors (CME) that add noise. The effect on OLS regression of these lack of signal errors (LoSE) is opposite the conventional wisdom about CME: while CME in the explanatory variables causes attenuation bias, LoSE in the dependent variable, not the explanatory variables, causes a similar bias under some conditions. In addition, LoSE in the dependent variable shrinks the variance of the regression residuals, making inference potentially misleading. The paper provides evidence that LoSE is an important source of error in US macroeconomic quantity data such as GDP growth, illustrates downward bias in regressions of GDP growth on asset prices, and provides recommendations for econometric practice.Error analysis (Mathematics) ; Gross domestic product