The U.S. and the World’s Recession

author: Roberto Rigobon, Sloan School of Management, Massachusetts Institute of Technology, MIT
published: Sept. 10, 2010,   recorded: June 2008,   views: 2931

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Roberto Rigobon somehow makes his audience laugh while summarizing preliminary research on worldwide inflation and recession, data that bring some grim tidings about our global economic state of health. (NB: Argentina and France get knocked about a bit in this talk.)

By pulling favors with friends at central banks, Rigobon has gathered data on the prices of every conceivable product from dozens of nations over many years, from the clothes we wear to the cars we drive. He searches for correlations between the changes in price of major commodities, such as wheat and rice, and price changes in domestic retail items associated with them, such as bread, pasta and cookies (the latter he admits are of special concern to him). He calculates both how much the increases are and how long it takes for the price increases to occur. In a similar fashion, Rigobon has charted the international price of oil over time, and the domestic prices of oil products.

Some of Rigobon’s findings: In Chile, when the price of wheat goes up by 10%, the price of bread goes up by 5% 18 months later. In Colombia and Peru, it takes three years for this same percentage increase to occur, with these countries taking longer “to digest the international shock of commodity prices.” Not only do the prices of bread, cookies, meat, chicken, move in lockstep with wheat, but in some cases, so do housing, health and education. But Rigobon found that when the international price of oil increases, there is an immediate impact on all products related to oil. What’s worse, when the price of oil increases, the price of gas at the pump or for a rental car goes up disproportionately.

It’s been true for years, notes Rigobon, that “oil is unconditionally negatively correlated with cereals.” If oil is up, maize, sorghum and wheat prices are down. But this has recently changed, a sign “of the unique times we’re in, the policy challenges we’re facing.” We are simultaneously facing recession (due in large part to the sub-prime mortgage crisis), and inflation, in both food and oil prices. Central banks, he notes with scorn and wonderment, don’t include food and energy in their calculations of “core inflation.” If the job of these banks and government is to take care of their citizens, they must respond to this crisis along the lines of the response to 9/11 or Enron. Rigobon endorses well-communicated, transparent policies, and some tough measures like interest rate increases.

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Reviews and comments:

Comment1 Dave Thomas, October 15, 2010 at 4:04 a.m.:

The professor said that economists don't know how to deal with inflation and high unemployment at the same time because the measures used to diminish inflation exacerbate unemployment and vice versa. My problem is that I just read an economic history that talked about a cure for just that mix of problems in the early 1920's by Secretary of Treasury Mellon and in the early 1980's by Reagan's administration.
The book, "Econoclasts" described how a combination of monetary policy targeting stable prices and fiscal policy targeting job creation worked together to deal with high unemployment in an inflationary environment. The professors statement to the contrary shocked me in light of these two academically researched historical examples.

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