Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Sunday, August 13, 2006

Why Oh Why Can't We Have a Better Press Corps? (Wall Street Journal Editorial Page Edition)

Jim Hamilton reminds us why, as Roger Altman has said, the Wall Street Journal sells for twice as much when its editorial page is ripped out of it:

Econbrowser: Good and not-so-good reasons to disagree with Bernanke: Some of the reasons people have given for why the Fed should keep raising interest rates make sense to me, and some don't. I have to say that the line of reasoning from the Wall Street Journal takes the cake:

The Fed's Open Market Committee decided not to raise interest rates again -- not because inflation is contained but because it says the economy is slowing. Uh, oh. Here we go again, back to the era of the Phillips curve, the economic theory that postulates a trade-off between inflation and unemployment. We thought Paul Volcker and Alan Greenspan had buried that notion years ago. But apparently it lives on like Arthur Burns's ghost in the attic of the Fed, ready to inhabit a new Chairman who has inherited an inflation and is afraid that breaking it will send the economy into recession.

To me, there is a basic question here that can be settled without appeal to ideology or consultation with ghosts. Surely the relevant question for an objective observer is the following: if the unemployment rate goes up or the rate of growth of real GDP slows down, should that cause a rational person to anticipate a lower rate of inflation than you would have predicted in the absence of those changes?

Harvard Professor James Stock and Princeton Professor Mark Watson, two of the nation's most careful and respected economic researchers, conducted a very thorough investigation of how well different models succeeded for purposes of forecasting inflation in an article published in the Journal of Monetary Economics in 1999. They compared Phillips-Curve specifications based on measures of the level of real activity such as the unemployment rate or the growth rate of industrial production with alternatives that included 19 different interest rate measures, 12 different measures of the money supply, 21 different price or wage indexes, and a number of other variables. Here was their conclusion:

The major conclusion of this study is that the Phillips curve, interpreted broadly as a relation between current real economic activity and future inflation, produced the most reliable and accurate short-run forecasts of US price inflation across all of the models that we considered over the 1970-1996 period. This conclusion will come as no surprise to applied macroeconomic forecasters in business and government, where the Phillips curve plays a central role in short-run economic forecasting. The conclusion is also consistent with the recent academic literature on short-run economic forecasting...

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