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Sunday, February 19, 2017

NAIRU And The Santa Claus Test

Chart: U.S. NAIRU (CBO) and the Unemployment Rate

Although economic squabbling is fun to follow, a lot of it is the result of the use of fuzzy language. As a result, there is no way of advancing the conversation; arguments are just people clinging to different definitions. The use of mathematics in economics is supposed to eliminate this squabbling; unfortunately, the mathematical models themselves rarely fit reality. However, we need to translate the debates into operational discussions, to see whether they can be applied to the real world. If we turn to my previous article about NAIRU, we need to ask ourselves -- does the definition of NAIRU we are using pass the Santa Claus test?

Saturday, February 18, 2017

NAIRU Should Be Bashed, Smashed, And Trashed

Professor Simon Wren-Lewis recently wrote an article "NAIRU Bashing," in which he attempts to salvage some value out of the concept. As observed by Ramanan, his defense of NAIRU can be summarised as: There Is No Alternative (TINA), A lot of what Professor Wren-Lewis wrote might appear similar to what I have written on the topic. (I will publish the relevant excerpt from Interest Rate Cycles: An Introduction  shortly, in case readers would wish to contrast and compare.) However, the belief that there is no alternative to NAIRU is silly. If economics were scholarly (as I discuss here), knowledge would be additive, and we would not have such debates.

Wednesday, February 15, 2017

U.S. Inflation Trends -- Not Really A Macro Theory Story

Chart: U.S. Core CPI Inflation

The January CPI inflation data were perkier than expected, causing some to dial up their forecasts for Fed rate hikes. I would not be surprised if the Fed becomes somewhat more hawkish over the coming months. Since they were hiking rates at a pace of 25 basis points per year, that bar was set fairly low. Although we should expect inflation to drift higher in the late stages of the economic cycle, macro theory is probably not going to give us much insights for near-run inflation forecasts.

Sunday, February 12, 2017

The Impact Of Household Expectations In SFC Models

The importance of household expectations is one of the key differences between mainstream macroeconomic models and those in the stock-flow consistent (SFC) tradition. Since I do not think mainstream macroeconomic models are useful, I will not spend my time comparing the two competing approaches. Instead, I will just discuss how household expectations can be handled within SFC models.

Friday, February 10, 2017

Macro Wars (Part 516)

There's been a recent resurgence in the ongoing "Macro Wars." One article in particular -- "It’s Time for New Economic Thinking Based on the Best Science Available, Not Ideology," by Eric Beinhocker -- has raised a lot of attention. I was going to respond, but my feeling is that it is best to stick to more concrete topics than wring our hands about philosophical issues.

Wednesday, February 8, 2017

The Python SFC Model Workflow

The way in the which the sfc_models package is typically used is distinctive. The objective is to focus the user’s attention upon the linkages between sectors of the economy, and not on the drudgery of national accounting. It is a preliminary computer-aided design (CAD) package for economics.

[This is a first draft of section taken from my next book in progress - Introduction to SFC Models Using Python.]

Sunday, February 5, 2017

Cyclical Situation Still Mediocre

Chart: U.S. hourly wages and core inflation

The latest labour market data from the United States remain consistent with my view that the rate of growth is not enough to greatly reduce the mass underemployment that is the reality of the labour market. That said, the market implications are limited, as this is already priced into the curve. The Fed may wish to step up its anaemic pace of rate hikes, but they will remain dependent upon the data.