UvA Professor of Macroeconomics downplays long-term impact of the crisis
4 November 2009
The method employed by the Netherlands Bureau for Economic Policy Analysis (CPB) to forecast the long-term effects of the economic crisis has proved inadequate. Their approach is not flexible enough nor is it suitable for distinguishing between the temporary and permanent effects of a crisis. This means that the CPB method leads to forecasts that are too negative when they concern crises whose effects are also temporary. This theory has been established by Wouter den Haan, Professor of Macroeconomics at the University of Amsterdam and Xiaoming Cai, Researcher at the Tinbergen Institute. Their findings were recently published in the working paper series of the Centre for Economic Policy Research (CEPR).
The CPB's forecasts about the Gross National Product (GNP) are based on a model that incorporates only information about the GNP. It is not possible to distinguish between various types of crises, financial or otherwise, if your results are based exclusively on the fluctuations of the GNP. Den Haan and Cai assert that these ‘one-type-shock models' are inclined to produce misleading forecasts and do not incorporate enough information. Their own research shows that forecasts made during the post-war recessions using the one-type-shock-method produced results that were too negative.
The model employed by Den Haan and Cai predicts that ‘takeover manoeuvres' generally always take place after a recession. As a result, the growth of the GNP is estimated as higher than it would be using the models employed by the CPB. The crux of the matter is that forecasts made using den Haan and Cai's ‘components model' predict only a drop of between 1.5 and 6 per cent for the USA's GNP, whilst the extent of the growth deceleration as forecast using the one-type-shock model is twice that percentage.
Forecasts using den Haan and Cai's model do not base themselves only on the fact that the GNP has dropped, but also on the extent to which this drop can be attributed to a decrease in consumption, investment, government funding and a deficit in the balance of trade. The components model offers greater possibilities to discover whether a recession tends to lead to temporary or permanent results. If more factors are taken into consideration than a drop in the GNP and the decrease in consumption and investments are included as a portentous factor in the prognosis as well, it would appear that the current crisis has a significant temporary component.