Recent Posts

Sunday, April 26, 2015

Why You Should Never Use The Hodrick-Prescott Filter

One very common task in finance and economics is to calculate the underlying trend of a time series. This is a well known problem in communication systems, and it is accomplished by designing a low-pass filter: a filter that eliminates high-frequency components of an input. For hard-to-understand reasons, some economists use the Hodrick-Prescott Filter (the "HP Filter") as a low-pass filter. Unfortunately, the HP Filter violates several principles of filter design, and generates misleading output. As a result, it should never be used. Although this topic sounds fairly technical, problems can be easily illustrated graphically. Even if you are not interested in filtering series yourself, these problems must be kept in mind when looking at economists' research if it is based upon the use of this filter. The conclusions may be based on defects created by the filtering technique.

Wednesday, April 22, 2015

The U.S. Business Cycle Viewed Through Multiple Models

Chart: Baker Hughes U.S. Rig Count (
The economy in the United States is not particularly buoyant, but it is doing better than I would have expected given the collapse in oil and gas drilling activity. Despite all of the wrangling over economic theory, it offers little insight into the state of the economy right now, never mind forecasting what will happen in six months. I believe that this is the result of the fact that we have to think of the economy using a number of models, and those models can disagree.

Sunday, April 19, 2015

Why Chartblogging Is Superior To Mainstream Macro

Orthodox-heterodox economic squabbling has once again erupted on the internet. As always, the mainstream argument is that their methodologies are superior because they are based on mathematical models. My main area of interest is the quantitative end of economics, so I do not pay too much attention to some of the purely literary approaches to economics. But even so, I believe that mathematical and statistical methods are being applied incorrectly by mainstream economists, and so whatever modelling advantage they have is largely illusionary. I illustrate this with a few examples, including an explanation why I believe the mainstream debate about the "natural rate" of interest is largely meaningless.

Wednesday, April 15, 2015

Questions Raised By The “Inflation Is The Same As Default” Theory

I quite often see variants of the following statement: “The government will be forced to default because of its debt load, or else pursue inflationary policies, which is another form of default.” In my view, this is a soundbite, not serious analysis, and it is very difficult to reason with soundbites. This article is a series of questions that are raised by this concept.

Sunday, April 12, 2015

Canadian Economy Going Nowhere, But Will The Budget Be Balanced?

Chart: Canadian Employment Rate

The Canadian economy has been performing better than my very low expectations, but that is not saying too much. The labour market is stagnant, and condo developers refuse to give up. The lack of drama is allowing the Federal Government to move towards fulfilling its campaign promises, including the adoption of balanced budget legislation.

Wednesday, April 8, 2015

The Budget Constraint Does Not Mean The Government Will Pay Off Its Debt

Professor Brad DeLong made some assertions about Modern Monetary Theory (MMT) in this article about bond bubbles, which drew responses on the Mike Norman Economics web site (here and here). Professor DeLong's points have a lot of embedded assumptions, and I cannot deal with all of them here. But I do discuss one assumption in my upcoming eReportUnderstanding Government Finance. This is the idea government 'has to pay back its debt'.

Saturday, April 4, 2015

"Fed To Hike Rates By Mid-Year": Yeah, But Which Year?

Chart: U.S. Employment Ratio (

The Employment Situation Report for March was at best mediocre. The Unemployment Rate and the Employment Ratio (pictured above) were unchanged. My "base case view" at the beginning of the year matched the consensus view, in that rate hikes by "mid-year" was the most likely outcome. However, the risks were skewed towards further delays, and this labour report pushes in that direction.