Blair Fix caused a bit of a stir last week on economics Twitter with a cleaned up version of the above chart taken from his article on interest rates and inflation. My chart is a scatter plot of the U.S. annual CPI inflation rate versus the effective funds rate, from 1954-2022. The blue line is the best linear fit of the two variables. The “linear model” suggests that inflation is an increasing function of the nominal interest rate.
Changing the variables to fit the facts is "normal" in neoclassical economics, and is even baked into central bank macro models like MARTIN. The Phillips curve is another great example of this - changing shape and position to fit the facts. The one big problem they all have is that these variables can only be observed ex-post, yet these models are supposed to be "predictive" and generate policy recommendations.
It's as if we are all stuck in a confirmation bias loop, using models that can accurately predict the past to generate policy recommendations for the future, and getting precisely the outcomes we deserve. It is easy to predict a recession when you are causing it!
Isn't the overwhelming empirical evidence the success that inflation targetting central banks have acheived since the early 1990s? I guess you could argue that success is entirely down to triggering recessions as needed to lower inflation, but I'm not convinced! I've seen Scott Sumner point to Australia as an example of inflation control without triggering recessions.
Also is "inflation normally thought of has an "outcome of trends in the real economy"? The real economy may provide the goods and services to be bought and sold, and perhaps even a "real" interest rate, but if we're going to talk about nominal prices (and/or their rate of change) aren't we also talking about nominal variables too?
There was a coordinated shift in employment policy and fiscal policy across the OECD starting the early 1990s, which people like Sumner ignore. Pretty easy to hit a 2% inflation target if you have tight fiscal policy.
Shortages are a real economy condition, and typically associated with price spikes. To what extent the Phillips Curve is valid, there is a link between unemployment and (wage) inflation.
Changing the variables to fit the facts is "normal" in neoclassical economics, and is even baked into central bank macro models like MARTIN. The Phillips curve is another great example of this - changing shape and position to fit the facts. The one big problem they all have is that these variables can only be observed ex-post, yet these models are supposed to be "predictive" and generate policy recommendations.
It's as if we are all stuck in a confirmation bias loop, using models that can accurately predict the past to generate policy recommendations for the future, and getting precisely the outcomes we deserve. It is easy to predict a recession when you are causing it!
Isn't the overwhelming empirical evidence the success that inflation targetting central banks have acheived since the early 1990s? I guess you could argue that success is entirely down to triggering recessions as needed to lower inflation, but I'm not convinced! I've seen Scott Sumner point to Australia as an example of inflation control without triggering recessions.
Also is "inflation normally thought of has an "outcome of trends in the real economy"? The real economy may provide the goods and services to be bought and sold, and perhaps even a "real" interest rate, but if we're going to talk about nominal prices (and/or their rate of change) aren't we also talking about nominal variables too?
There was a coordinated shift in employment policy and fiscal policy across the OECD starting the early 1990s, which people like Sumner ignore. Pretty easy to hit a 2% inflation target if you have tight fiscal policy.
Shortages are a real economy condition, and typically associated with price spikes. To what extent the Phillips Curve is valid, there is a link between unemployment and (wage) inflation.