GDP-linked Bonds: A Primer

Gross government debt in advanced economies has surpassed 105% of GDP, up from less than 75% a decade ago. Some countries with especially large debts—including Greece (177%), Italy (133%) and Portugal (129%)—are viewed not only as a risk to the countries themselves, but to others as well. As a result, policymakers and economists have been looking for ways to make it easier to manage these heavier debt burdens.

One prominent suggestion is that countries should issue GDP-linked bonds that tie the size of debt payments to their economy's well-being. We find this idea attractive, and see the expanding discussion of the viability of GDP-linked bonds both warranted and useful (see here and here). However, the practical issues associated with GDP data revision remain a formidable obstacle to the broad issuance and acceptance of these instruments....

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Forecasting Trend Growth: Living with Uncertainty

“Negative capability … is when a man is capable of being in uncertainties, mysteries, doubts, without any irritable reaching after fact and reason…” John Keats, 1817.

Will growth be high in the future?  Or, will it be low? Everyone is preoccupied with this question in one way or another. Individuals worry about whether their real incomes will grow. Fiscal policymakers wonder what will happen to tax revenues and required expenditures. And central bankers are trying to figure out whether they should ease or tighten monetary policy...

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Measuring inflation: Signal extraction redux

Not long ago, we posted a commentary discussing the difficulty of interpreting GDP data. The problem is one of extracting the true signal of economic growth from the noisy way that we measure output.

This signal extraction problem is generic in economics (and other sciences that use statistics). Indeed, one of us began his professional career trying to discern the trend of U.S. inflation. It was 1980 and the inflation numbers were hitting a peak of nearly 20%. The standard operating procedure at the time was to take things like food, energy and some housing-related items out of the index and recalculate them. But that meant removing only the components that had gone up more than average! How could you justify that?

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GDP: Seasons and revisions

Growth from the fourth quarter of 2013 to the first quarter of 2014, originally thought to have been about +0.1% in April, was revised last week to –2.9%. That’s at a seasonally-adjusted, annualized rate (SAAR) – the way the U.S. Bureau of Economic Analysis (BEA) usually reports real GDP growth. News reports varied between shock and concern. Was the anemic recovery over?Or, was it just that this winter was especially harsh?

In reality, these headline growth numbers simply don’t contain all that much information for real-time business cycle analysis...

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Data: big and small

Everyone is talking about “big data” – the use of massive quantities of information to analyze everything from the weather to the concentration of matter in the universe. For several years, economists have been getting into the big data act, too. One example is nowcasting – using vast arrays of electronic data to assess the current state of the economy ("now”) rather than waiting for official data and its inevitable delays. 

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