Research Topics

In their latest Strategic Analysis, Distinguished Scholar Wynne Godley, President Dimitri B. Papadimitriou, and Research Scholars Greg Hannsgen and Gennaro Zezza review recent events in the housing and financial markets to obtain a likely scenario for the evolution of household spending in the United States. They forecast a significant drop in borrowing and private expenditure in the coming quarters, with severe consequences for growth and unemployment, unless (1) the US dollar is allowed to continue its fall and thus complete the recovery in the US external imbalance, and (2) fiscal policy shifts its course—as it did in the 2001 recession.

The collapse in the subprime mortgage market, along with multiple signals of distress in the broader housing market, has already drawn forth a large body of comment. Some people think the upheaval will turn out to be contagious, causing a major slowdown or even a recession later in 2007. Others believe that the turmoil will be contained, and that the US economy will recover quite rapidly and resume the steady growth it has enjoyed during the last four years or so.

Yet no participants in the public discussion, so far as we know, have framed their views in the context of a formal model that enables them to draw well-argued conclusions (however conditional) about the magnitude and timing of the impact of recent events on the overall economy in the medium term—not just the next few months.