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Dynamic stochastic general equilibrium (DSGE) models have been trashed, bashed, and abused during the Great Recession and after. One of the many reasons for the bashing was the models’ alleged inability to forecast the recession itself. Oddly enough, there’s little evidence on the forecasting performance of DSGE models during this turbulent period. In the paper “DSGE Model-Based Forecasting,” prepared for Elsevier’s Handbook of Economic Forecasting, two of us (Del Negro and Schorfheide), with the help of the third (Herbst), provide some of this evidence. This post shares some of our results.
Today’s post, which complements Monday’s on New York State, considers the Great Recession’s impact on education funding in New Jersey. Using analysis published in our recent staff report, “Precarious Slopes? The Great Recession, Federal Stimulus, and New Jersey Schools,” we examine how school finances were affected during the recession and the ARRA federal stimulus period. We find strong evidence of a significant decline—relative to trend—in school revenues and expenditures following the recession as well as key compositional changes that could affect school financing and student learning. Our findings are noteworthy in view of the importance of investing in children’s education for human capital formation and economic growth.
Surprisingly, there is no literature on how recessions (including the Great Recession) have affected schools. Perhaps this is because educational funding stresses and decisions vary among and within states, which makes it hard to reach general conclusions. Yet schools play an indispensable role in our society, educating the populace and building the nation’s future. Therefore, it is important to understand how the Great Recession is affecting public spending on schools, the delivery of education services, and student learning. In this post, we analyze one state’s experience, drawing on our study “The Impact of the Great Recession on School District Finances: Evidence from New York.” While we do not find evidence of much impact on schools’ overall revenue or expenditures, we do detect important compositional changes that could affect both student learning and school financing in coming years.
Experience shows that what happens is always the thing against which one has not made provision in advance.
-- John Maynard Keynes1
Our best plan is to plan for constant change and the potential for instability, and to recognize that the threats will constantly be changing in ways we cannot predict or fully understand.
-- Timothy Geithner2
The economics profession has been appropriately criticized for its failure to forecast the large fall in U.S. house prices and the subsequent propagation first into an unprecedented financial crisis and then into the Great Recession. In this post, I examine the performance of the forecasts produced by the economic research staff of the Federal Reserve Bank of New York (New York Fed) over the period 2007-10 and consider some of the reasons why we, like most private sector forecasters, failed to predict the Great Recession. This spreadsheet contains staff forecasts, the outcomes, and a standard measure of private sector forecasts—the Blue Chip consensus. In addition, staff material prepared for bi-annual meetings of the New York Fed Economic Advisory Panel provide some further insights into the evolution of the staff outlook.
In 2008, as the financial crisis unfolded and the U.S. economy tumbled into a sharp recession, the outlook for the tri-state region (New York, New Jersey, and Connecticut) and especially New York City—the heart of the nation's financial industry—looked grim. Regional economists feared an economic downturn as harsh as the one in 2001, or the even deeper recession of the early 1990s. Now, as the recovery takes hold, we can report that although the economic downturn was severe in the region, with the unemployment rate surging above 9 percent in many places, it was less severe than many had anticipated. This post—which is based on the New York Fed’s May 6 Regional Economic Press Briefing—recaps how the Great Recession affected employment across the region, how the ensuing recovery has progressed, and what the prospects are for job growth as we go forward.
In this post, I show that despite the depth of the Great Recession, U.S. employers did not use temporary layoffs much to cut costs. Just as they did during the previous two recessions, when firms laid workers off, they usually severed ties completely. This prevalence of permanent layoffs during the recession could slow the employment rebound over the coming months. It also raises questions about why the behavior of employers during recessions has changed.
Liberty Street Economics features insight and analysis from economists working at the intersection of research and policy. The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Donald Morgan.
The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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