How Long Is the Short Run This Time?
How long does it take to go from the short run to the long run? As I say repeatedly, I used to teach my students that the “short run” was the next couple of years, that the long run was from seven years from now on out, and that in between were interesting and confused medium-run transition dynamics–plus there is always the possibility that forward-looking expectations can lead the long run to come like a thief in the night, suddenly, immediately, long before you expect it to.
This set of beliefs on my part led to a crude and rough analytical strategy: Use the fixed-price macroeconomics of Hicks (1937), Modigliani (1944), and Metzler (1951) to make your forecasts of what will happen over the next two years. Use a classical full employment model to make your forecast what will happen starting seven years from now. Wave your hands and connect the dots to make your forecast for the intermediate period.
This analytical strategy has been very wrong for the past decade. And while David Beckworth has found one quantitative yardstick–the liquid asset household portfolio share–that says we are now back to or near normal and that the “short run” is over, there are others–interest rates and asset prices–that tell us the short run is still very far from over.
The very sharp David Beckworth:
: The Long Unwind of Excess Money Demand: “Two years ago… I…
…[made] the case that the economy was still being plagued by excess money demand… [a] problem [that] occurs when desired money holdings exceed actual money holdings. This imbalance causes a rebalancing of portfolios toward safe assets away from riskier ones… causes a decline in aggregate demand…. is one way to view the long slump. My argument back then was that even though the excess money demand problem peaked in 2009 it still was being unwound in 2013 and therefore still a drag on the economy….
I thought I would update the chart…. The figure below shows… how long it has taken for household portfolios to return to more normal levels of liquidity. It has taken six years and appears not completely done yet! Remember this the next time someone tells you that the aggregate demand shocks were all were worked out years ago…. The fact that a large portion of the liquid share of household assets has declined over the past six years shows that its elevated rise was not a structural development but a cyclical one. It also suggests that more could have been done to hasten its return to normal levels…. It should not take this long for a business cycle to unwind.