tag:blogger.com,1999:blog-2499715909956774229.post7925028763994572879..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: The Labor Market and the FOMC MeetingStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger23125tag:blogger.com,1999:blog-2499715909956774229.post-66425909785033173202014-03-26T14:02:19.967-07:002014-03-26T14:02:19.967-07:00Kooks gonna kook. ^Kooks gonna kook. ^Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-57113218562669463482014-03-24T04:04:09.536-07:002014-03-24T04:04:09.536-07:00"If the Fed wants higher inflation, the polic..."If the Fed wants higher inflation, the policy rate needs to rise"<br /><br />Sure and the apple does not fall to the ground but fly upwards. Thank God Yellen is at the helm of the Fed and not some voodoo economists who are wrong about everything that matters (where's the inflation you predicted as a consequence of QE?).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-27244212193472838662014-03-23T19:35:25.998-07:002014-03-23T19:35:25.998-07:00Stephen, what you've done in that post and oth...Stephen, what you've done in that post and others is successfully argue against a stable phillips curve in which unemployment alone predicts wage growth with 100% accuracy. But nobody is arguing for such a curve, and as far as I know, nobody has argued for such a curve for at least 35 years. What you have not done is shown that slack in the economy tends to result in slower wage growth, all else equal. Doug Campbell https://www.blogger.com/profile/11028049845008665877noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-84690894788186877002014-03-23T19:02:51.318-07:002014-03-23T19:02:51.318-07:00I wrote about a related Krugman post here:
http:/...I wrote about a related Krugman post here:<br /><br />http://newmonetarism.blogspot.com/2013/12/grilled-cheese-sandwich.htmlStephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-79057275937245895722014-03-21T09:48:26.252-07:002014-03-21T09:48:26.252-07:00Duh. Forgot the link
http://krugman.blogs.nytimes...Duh. Forgot the link<br />http://krugman.blogs.nytimes.com/2014/03/12/wages-of-fear-somewhat-wonkish/Paul Friesenhttp://www.andwhyisthat.canoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-71184494874853625992014-03-21T09:45:43.311-07:002014-03-21T09:45:43.311-07:00Here's a link to a Krugman post showing a Phil...Here's a link to a Krugman post showing a Philips curve. As suggested above, this uses wage inflation, not consumer price inflation.<br /><br />To my mind, that is what it makes sense to use. after all, one would expect slackness in the demand for labour to show up first in the price of labour, and only later, perhaps, be transmitted to other prices. But things like a commodity price boom due to growing demand elsewhere in the world would be expected to mess up the relationship.Paul Friesenhttp://www.andwhyisthat.canoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-60754343183280731382014-03-20T09:45:22.151-07:002014-03-20T09:45:22.151-07:00"the Fed reduced purchases relative to its pr..."the Fed reduced purchases relative to its previous stated plan. "<br /><br />Wrong.<br /><br />How is this wrong. Here are the December minutes: http://www.federalreserve.gov/newsevents/press/monetary/20131218a.htm.<br /><br />At the December meeting they reduced asset purchases by $10/billion per month and said they would continue purchasing the reduced amount each month. Sure, they also said that they would continue to reduce purchases if things continue to get better. But since December, we've had three pretty weak job reports, and the core CPI has also fallen. (And last Core PCE reading was what, 1.3%?) <br /><br />Since the markets read this as a tightening event, erroneously in your view = Profit opportunity for Stephen Williamson?<br /><br />But, I'm still quite curious what the logic is for why monetary policy tightening could lead to higher inflation?Doug Campbell https://www.blogger.com/profile/11028049845008665877noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-6792179546905210142014-03-20T06:50:11.015-07:002014-03-20T06:50:11.015-07:00"the Fed reduced purchases relative to its pr..."the Fed reduced purchases relative to its previous stated plan. "<br /><br />Wrong.<br /><br />"How do you mean?"<br /><br />Read this:<br /><br />http://newmonetarism.blogspot.com/2013/12/phillips-curves-and-fisher-relations.html<br /><br />"So, what shock would lead to lower GDP and lower inflation without the lower inflation operating via slack? "<br /><br />You're thinking about it the wrong way. What you're calling slack is not a sufficient statistic that forecasts inflation. The Phillips curve is a correlation that we sometimes see in the data, and sometimes we don't see it. It's not structural. We learned that a long time ago.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-82186913993617153002014-03-19T22:05:47.639-07:002014-03-19T22:05:47.639-07:00"If by "systematic" you mean stable..."If by "systematic" you mean stable, then I don't agree."<br /><br />Nope -- as I stated, I understand that the Phillips Curve can shift. But the insight that the Phillips Curve can shift is a long way from the conclusion that it doesn't matter...<br /><br />"But they aren't tightening - not yet."<br /><br />The markets read this as a tightening event. That's because it was a tightening event -- the Fed reduced purchases relative to its previous stated plan. <br /><br />"Yes, and the only way for inflation to go up is for the Fed to do what you call "tightening.""<br /><br />How do you mean? Are you in the Robert Barro camp, believing that high interest rates lead to low unemployment rather than the other way 'round?<br /><br />"Some aggregate shocks make inflation and output move in the same direction"<br /><br />So, what shock would lead to lower GDP and lower inflation without the lower inflation operating via slack? And, why wouldn't workers be able to bargain for higher wages in a tight labor market than in a very slack labor market?<br /><br />Thanks for your responses, btw. <br />Doug Campbell https://www.blogger.com/profile/11028049845008665877noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-34528482298104913802014-03-19T17:55:34.159-07:002014-03-19T17:55:34.159-07:00"one can easily find a systematic Phillips cu..."one can easily find a systematic Phillips curve-type relation if one looks"<br /><br />Not quite. If by "systematic" you mean stable, then I don't agree. In the next sentence, delete "not". And it's not easy. You have to go through a specification search, and try different data sets. You can find something, but it won't be useful.<br /><br />"unemployment isn't a comprehensive measure of slack"<br /><br />So, what's your measure of slack?<br /><br />"why the Fed is tightening monetary policy..."<br /><br />But they aren't tightening - not yet.<br /><br />"low inflation seems so clearly problematic... "<br /><br />Yes, and the only way for inflation to go up is for the Fed to do what you call "tightening."<br /><br />"Re: the predictive power of slack."<br /><br />Some aggregate shocks make inflation and output move in the same direction; some shocks make them move in opposite directions. Seems we want to think about all the shocks. Why are you so stuck on the Phillips curve?Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-27088214694563860922014-03-19T15:41:28.802-07:002014-03-19T15:41:28.802-07:00OK, than it seems we agree here on multiple points...OK, than it seems we agree here on multiple points. E.g., one can easily find a systematic Phillips curve-type relation if one looks. i'd also agree that they are not unstable, particularly since unemployment isn't a comprehensive measure of slack and expectations change over time. <br /><br />I also agree with you that the Fed is going to continue to fall short of its inflation target. What I don't understand is why the Fed is tightening monetary policy given that you and I (and many others) agree that inflation will be below target. Given the debt overhang, low inflation seems so clearly problematic... <br /><br />Re: the predictive power of slack. How many recessions can you find, in the US or anywhere else, in which a large increase in unemployment is not associated with a decline in inflation? As I've stated twice, such examples will invariably be limited to cases where there are large movements in oil/commodity prices, or perhaps some true case of hyperinflation, war, or some other obvious external factor... Perhaps there are such cases -- if so, what are they? If not, then that is predictive power... Doug Campbell https://www.blogger.com/profile/11028049845008665877noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-47293038343898267212014-03-19T15:11:05.990-07:002014-03-19T15:11:05.990-07:00As I've said before, if you go looking for a P...As I've said before, if you go looking for a Phillips curve relation, you can find it in the data. But, the evidence, for example the JEL paper I cited above, tells you that Phillips curves, if they don't slope the wrong way, are unstable. Further, you can do simple forecasting exercises that show that a monkey can do a better job of forecasting inflation that an economist equipped with a Phillips curve. By the way, my forecast for the coming year is that the Fed is going to fall well short of both its inflation forecast and its 2% inflation target.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-40902848834278469582014-03-19T14:55:53.381-07:002014-03-19T14:55:53.381-07:00Perhaps I am blind -- because not only do I see a ...Perhaps I am blind -- because not only do I see a clear systematic relationship between slack and inflation in Krugman link, I also don't see this hyperinflation you've been worrying about for years, despite the slack in the economy... Doug Campbell https://www.blogger.com/profile/11028049845008665877noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-55186804140705265632014-03-19T14:43:55.078-07:002014-03-19T14:43:55.078-07:00"The hypothesis of "no relation between ..."The hypothesis of "no relation between slack and inflation" doesn't look good from my vantage..."<br /><br />Maybe if you have your eyes closed.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-10187444263819413372014-03-19T14:39:48.174-07:002014-03-19T14:39:48.174-07:00More on a preferred measure in a bit. But one thin...More on a preferred measure in a bit. But one thing you might see if people are leaving the labor force, driving down the unemployment rate but not really reducing slack in the economy (or reducing slack less than if they had gotten a job) is that the Phillips Curve would shift to the left. Indeed, that's what we see, to link to Stephen's favorite economist: http://krugman.blogs.nytimes.com/2012/04/08/unemployment-and-inflation/<br /><br />What is striking about those spirals is how systematic, intuitive, and easy to explain they appear to be in terms of slack, expectational changes, workers leaving the labor force, and downward nominal rigidities. The hypothesis of "no relation between slack and inflation" doesn't look good from my vantage... Doug Campbell https://www.blogger.com/profile/11028049845008665877noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-87776669482172266802014-03-19T14:09:53.034-07:002014-03-19T14:09:53.034-07:00"Since 2011, there has continued to be consid..."Since 2011, there has continued to be considerable slack in the economy and hence the Core PCE deflator has continued to be well below 2 percent. I'm struggling to see the contradiction... "<br /><br />Construct your desired measure of slack, and choose your desired measure of the inflation rate. Then show me how your Phillips curve fits the data.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-10808653420746162542014-03-19T13:27:22.268-07:002014-03-19T13:27:22.268-07:00But fortunately, unemployment is not the only meas...But fortunately, unemployment is not the only measure we have of the labor market. During this time, employment-to-population growth for prime-age workers has barely increased, and job growth, while very steady, has been lackluster. Additionally, GDP growth has also been slow. So the rosy picture we get when we restrict ourselves to just looking at unemployment is misleading. This doesn't mean that the Phillips Curve doesn't have predictive power, it means that the unemployment rate alone doesn't always tell the full story.<br /><br />Since 2011, there has continued to be considerable slack in the economy and hence the Core PCE deflator has continued to be well below 2 percent. I'm struggling to see the contradiction... <br /><br />Above I wrote that the examples of the Phillips Curve not working are going to associated with things such as commodity price movements -- and sure enough, in your linked post, you mix in periods of commodity booms and busts with other periods. What you've refuted is a stable Phillips Curve impervious to large commodity price shocks. But no one is arguing for such a stable curve...Doug Campbell https://www.blogger.com/profile/11028049845008665877noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-33626012642737474252014-03-19T12:23:56.135-07:002014-03-19T12:23:56.135-07:00"Ah, but as a Keynesian economist, before the..."Ah, but as a Keynesian economist, before the crisis, if you 'd have told me that unemployment would rise above 10%, and that the Fed would respond by reducing interest rates close to zero and by pumping $2 trillion into the economy, I would have predicted at least a large decline in inflation, and some deflation. Indeed, that's what we saw. That's predictive power."<br /><br />Ah, afraid not. Sometimes the Phillips curve works, and sometimes not. Read this:<br /><br />http://newmonetarism.blogspot.com/2013/12/phillips-curves-and-fisher-relations.html<br /><br />Since Fall 2011, pce inflation has been falling while the unemployment rate has been falling. Great predictive power.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-13096420791208849622014-03-19T11:15:43.294-07:002014-03-19T11:15:43.294-07:00"The idea that some measure of slack in the e..."The idea that some measure of slack in the economy can help explain inflation, or predict it, appears rather foolish."<br /><br />Ah, but as a Keynesian economist, before the crisis, if you 'd have told me that unemployment would rise above 10%, and that the Fed would respond by reducing interest rates close to zero and by pumping $2 trillion into the economy, I would have predicted at least a large decline in inflation, and some deflation. Indeed, that's what we saw. That's predictive power. <br /><br />On the other hand, not to point any fingers, but many non-Keynesian economists thought that the Fed's money-printing would surely lead to a large sustained rise in inflation, even with a lot of slack in the economy. Alas, no such rise in inflation came to pass. It seems these economists didn't appreciate the inability of workers to negotiate wage increases when unemployment remained elevated.<br /><br />What evidence suggests that inflation doesn't tend to decline when there is slack? The examples are going to be associated with oil or commodity price movements, exchange rates, or VAT increases or some other external factor... Doug Campbell https://www.blogger.com/profile/11028049845008665877noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-13740791528598884592014-03-18T13:16:01.197-07:002014-03-18T13:16:01.197-07:00Two points:
1. The Phillips curve the Fed seems i...Two points:<br /><br />1. The Phillips curve the Fed seems interested in is the one they claim helps them predict the inflation measure they are interested in, i.e. raw pce inflation.<br />2. Aggregate wage measures are a tricky thing. There are issues to do with changes in non-wage compensation, as well as the skill composition of the labor input.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-77893982352099400752014-03-18T12:18:25.161-07:002014-03-18T12:18:25.161-07:00I have seen several authors plot wage growth again...I have seen several authors plot wage growth against the unemployment rate as a kind of Philips curve. The figure looked better than yours--there was a better fit--but I am still not sure what to make of the relationship.anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-22075493590283038432014-03-18T12:18:10.074-07:002014-03-18T12:18:10.074-07:00I was told in econometrics class that we're al...I was told in econometrics class that we're always estimating something. It's knowing what that is that's the crux of the problem.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-9127133309720601742014-03-18T12:02:33.251-07:002014-03-18T12:02:33.251-07:00Minor typo: "... econometricians estimating P...Minor typo: "... econometricians estimating Phillips curves are not estimating anything useful ...." I think you mean "... macroeconomists estimating Phillips curves are not estimating anything useful ...."<br /><br />Sorry, I couldn't help myself.michaelhttps://www.blogger.com/profile/15748396690515907086noreply@blogger.com