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November 6, 2014

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Posted: 06 Nov 2014 12:06 AM PST

Election Thread

Posted: 05 Nov 2014 09:49 AM PST

If you have thoughts on the election...

'Neo-Fisherites and the Scandinavian Flick'

Posted: 05 Nov 2014 09:25 AM PST

Nick Rowe:

Neo-Fisherites and the Scandinavian Flick: Noah Smith wonders if "reality might topple a beloved economic theory". Well, if you look at Sweden, reality just confirmed that beloved economic theory. The Riksbank raised interest rates because it was scared that low interest rates would cause financial instability. Lars Svensson resigned in protest. Then inflation fell, and the Riksbank needed to cut interest rates even lower than before.
That's only one data point. But there are loads more.

If you don't know how to drive a car, and you don't even have a clue whether you turn the steering wheel clockwise or counter-clockwise if you want to turn right, one good strategy is to borrow a car, and a wide open field, and experiment. Make a random turn of the wheel, and see what happens. The recent data point in Sweden was a natural experiment like that. But Sweden is not a wide open field, and it's hard to borrow a car to experiment like that on regular roads.

An alternative strategy is to ask an experienced driver which way to turn the wheel. Preferably a driver who has managed to keep his car out of the ditch for the last 20 years. Like the Bank of Canada. And if the Bank of Canada says that it cuts interest rates when inflation is falling below target, and it wants to bring inflation back up to target, you listen. They are either right, or wrong and very very lucky.

Never ignore the advice of experienced practitioners, who have had their hands on the steering wheel for a very long time. Unless you have a very good theory about why they might be deluded.

Theory says, and the data confirm, and the advice of experienced practitioners confirms, that if it wants to raise inflation the central bank should first lower interest rates. Then, when inflation and expected inflation starts to rise, it can raise interest rates, higher than they were before. Then, and only then, does the Fisher effect kick in, and we see a positive correlation between inflation and nominal interest rates. That is the Scandinavian flick we saw recently in Sweden. ...

There's more.

'Forecasting Inflation with Fundamentals . . . It’s Hard!'

Posted: 05 Nov 2014 09:11 AM PST

It's a mystery why inflation is such a mystery:

Forecasting Inflation with Fundamentals . . . It's Hard!, by Jan Groen, Liberty Street Economics, NY Fed: Controlling inflation is at the core of monetary policymaking, and central bankers would like to have access to reliable inflation forecasts to assess their progress in achieving this goal. Producing accurate inflation forecasts, however, turns out not to be a trivial exercise. This posts reviews the key challenges in inflation forecasting and discusses some recent developments that attempt to deal with these challenges. ...

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