GDP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 11

[DrSpike]

Originally posted by HershOstropoler

As for NAIRU - it has a rather poor track record even for the US, has it not.... for European labour markets with their differing institutional framework it is even less useful. Where you put NAIRU for the US and the Eurozone ?

Not really. NAIRU (and I'm not sure from your post, but it should be clear that each economy has its own NAIRU)is stable enough to be a guide. And if you have reason to think it may have changed, due to, say, a hypothetical permanent upward shift in potential productivity growth then you can use the (albeit not perfect) model you have built to see what that implies for possible policy. Or, as some would have it, you can mumble something about the model not being perfect, scrap it, and just conduct policy by flipping a coin.

In the US NAIRU is around 4.5-5% IIRC. UK around 6%, and on average higher for most eurozone countries.

[Colon™]

Originally posted by DrSpike


Oh dear. There are many misconceptions I can accept in threads such as these......some of the time they don't matter to me as long as the big picture is understood. Please post again and tell me you were joking/trying to bait me. Pretty please. With sugar on. Think about my health - my blood pressure raises itself to dangerous levels when people seriously mean such stupidity.

Why not, set a money supply target and ban discretionary spending based on output fluctuations. Discretionary spending is usually a pork barrel fest anyway.

(ok, don’t take that too literally but it seems a better starting point)

[HershOstropoler]

"NAIRU (and I'm not sure from your post, but it should be clear that each economy has its own NAIRU)is stable enough to be a guide."

Ad each economy - do I really have to say NAIRUs to be understood ? As for the eurozone, take your pick whether you lump one average together or split it up.

As for how it works.... so you assume NAIRU for germany to be what, 7 % ? 8 %?

What changed that from the 1960s/early 70s where I suppose the NAIRU estimate would be 2 % unemployment or so ?

"then you can use the (albeit not perfect) model you have built to see what that implies for possible policy. Or, as some would have it, you can mumble something about the model not being perfect, scrap it, and just conduct policy by flipping a coin."

You are avoiding the issue which is whether a NAIRU guesstimate lumped together with other guesstimates like productivity growth trends is more reliable than flipping a coin.

Sorry for your blood pressure.

[DrSpike]

The importance of knowing recent economic history raises its oversized head once more. We didn't reach the dominant paradigm of an independent central bank using an inflation target and floating exchange rates overnight.......it is the culmination of years of painstaking research and trial and error. The targeting of various monetary aggregates......targeting of exchange rates......mechanistic non-discretionary rules, these are all possible. Ultimately they are all inferior to the dominant paradigm.

[DanS]

"5.9% in '90 and 4.5% now?"

Well, I must have misremembered on the absolute figures. But over a series of articles in The Washington Post over about 3 years, you got the feeling that NAIRU was the benchmark being used by most economists, including Greenspan. But they were surprised when we kept creeping below NAIRU and had little inflation.

So they were willing to give the economy a little more leash than they otherwise would.

[Colon™]

Originally posted by DrSpike
The importance of knowing recent economic history raises its oversized head once more. We didn't reach the dominant paradigm of an independent central bank using an inflation target and floating exchange rates overnight.......it is the culmination of years of painstaking research and trial and error. The targeting of various monetary aggregates......targeting of exchange rates......mechanistic non-discretionary rules, these are all possible. Ultimately they are all inferior to the dominant paradigm.

So according to you, we reached Nirvana without knowing it?

PS: almost 500 posts, who wants to start the next instalment of these series?

[HershOstropoler]

"CB independency" per se doesn't put a policy on the table. What is recent history telling us about NAIRU ?

[DrSpike]

Originally posted by HershOstropoler
You are avoiding the issue which is whether a NAIRU guesstimate lumped together with other guesstimates like productivity growth trends is more reliable than flipping a coin.

There is no lumping together.........each economy estimates its own NAIRU and uses that to help guide policy. And yes, in my opinion (and thankfully, in the opinion of everyone who counts in the world of economics), policy based on good guesstimates is better than policy based on flipping a coin.

[Colon™]

Originally posted by DanS
"5.9% in '90 and 4.5% now?"

Well, I must have misremembered on the absolute figures. But over a series of articles in The Washington Post over about 3 years, you got the feeling that NAIRU was the benchmark being used by most economists, including Greenspan. But they were surprised when we kept creeping below NAIRU and had little inflation.

So they were willing to give the economy a little more leash than they otherwise would.

Is that an argument pro or contra NAIRU?

[HershOstropoler]

Again, the issue is "good guesstimate" or "bad guesstimate".

"There is no lumping together...."

Hmm... you said:

if you have reason to think it may have changed, due to, say, a hypothetical permanent upward shift in potential productivity growth then you can use the (albeit not perfect) model you have built to see what that implies for possible policy.

That should roughly be what the greenspan fed did, based on assumptions about NAIRU originally being at 5-6 % and supposedly accelerated poductivity growth pushing it lower. The result was an artificial easy money boom and the current hangover.

[DrSpike]

Originally posted by Colon


So according to you, we reached Nirvana without knowing it?

Don't be silly. The point is that we have tried lots of things, and what we do now works better than all those things.

Anyway, enough. I have to do some work this afternoon.

I hope I have succeeded in convincing you all of the worth of imperfect tools like output gaps and NAIRU, and I hope there is none among you that seriously believes in ditching discretionary policy.

C you in the next thread.

[Colon™]

Originally posted by DrSpike


There is no lumping together.........each economy estimates its own NAIRU and uses that to help guide policy. And yes, in my opinion (and thankfully, in the opinion of everyone who counts in the world of economics), policy based on good guesstimates is better than policy based on flipping a coin.

Think so? The history of economic forecasts and policies based on that is pretty bad. How often hasn't it been that a CB kept increasing the rate while the economy was already entering a downturn? Or that govt passed tax cuts that only had their effect when the economy was already blossoming again?

[DrSpike]

I'll start a new one before Ming comes in and slaps us.