Blog: May 2018
How do we know if the economy is doing well? For many decades, the short answer to that question has been to review a single number: Gross Domestic Product (GDP). If the GDP grows, spirits are high. If the GDP declines or its growth rate slows, concerns abound.
My paper, Pricing Assets in a Perpetual Youth Model, was recently published in the Review of Economic Dynamics. The paper uses mathematics to make a point. But the idea is simple and worth explaining in English. Here is what I said about it when I first put out the working paper in May of 2016.
A debate is raging among both academics and policymakers whether wage growth and unemployment still form a negative relationship, in other words, whether the wage Phillips curve is alive.
Real wages are currently growing considerably below the pre-crisis average in many advanced economies. This is particularly striking especially against a backdrop of tight labour markets across a number of G7 economies, leading many economists to question the well-known relationship between unemployment and wage growth that is embodied in the wage-Phillips curve. Take the UK as an example, why is wage growth so low with the unemployment rate at a 40 year low of 4.2 per cent? Back in 1975, when the unemployment rate was at similar levels, wage growth was above 30 percent in nominal terms.
The Trump administration has embarked on an ambitious trade policy agenda supposedly to strengthen the US economy and reduce its trade deficit. Amongst other things, the government initiated renegotiations of existing trade deals (such as NAFTA) and started to enforce US trade laws aggressively, not shying away from unilateral actions.