20-11-2002 19:41									#481
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quote: Originally posted by DrSpike I can empathise with that view, but NAIRU and output gap calculations are far from useless in practical macroeconomics I assure you. Output gaps and NAIRU are a powerful way of organising your thinking about some key macroeconomics issues......some of the posts in this thread are good examples of the sorts of muddles you can get yourself into quite easily when you have no framework in which to analyse problems.

It’s really cool it helps to organise my thinking but that doesn’t make NAIRU more reliable when basing your calculations on it.

quote: Ultimately policy decisions need to be undertaken in an uncertain world. Give me a choice between an imperfect tool and no tool at all I know which I will take every time.

I'd rather have it that policy decisions are made whilst actually keeping in mind that the tool is imperfect. That's hardly the case, a lot of people have problems distinguishing estimations and truths.

	20-11-2002 19:43									#482
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quote: Originally posted by DrSpike I explained in a previous post. *edit*. 4.2% actual.........hehe..........does that bother you?

No, it will just be fun to bait Yankees and Limeys with it when I get the chance.

	20-11-2002 19:45									#483
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France got revised upward almost 1 % age point, the US down about the same amount.... who knows what will happen to current guesstimates.

"Output gaps and NAIRU are a powerful way of organising your thinking about some key macroeconomics issues......"

I can empathise with that view, but how do you measure an output gap ?

	20-11-2002 19:48									#484
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quote: Originally posted by Colon I'd rather have it that policy decisions are made whilst actually keeping in mind that the tool is imperfect. That's hardly the case, a lot of people have problems distinguishing estimations and truths.

The first sentence is exactly how it is. The second is true, but not of the people who count! Things like output gap statistics are guides.......no-one within the profession takes them as gospel. I repeat, bettter to make important decisions with guides than without, so such considerations are far from useless as yourself and Roland have suggested.

	20-11-2002 19:52									#485
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quote: Originally posted by HershOstropoler I can empathise with that view, but how do you measure an output gap ?

Check out my posts above. If you want more detailed econometric info I expect the IMF site Dan linked to will have something on their methodology.

	20-11-2002 19:58									#486
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Ok, we're in Japan 1992, the bubble burst but things are still ok, productivity growth holding up, unemployment is low and consumption is strong. You just had years of +4% productivity growth after and a couple of years of sub-NAIRU won't hurt.
10 years later, Japan's output gap is 13% according to the NAIRU of the time. According the 'new' NAIRU the output gap is only a couple of %.

Policy mistakes perhaps but they seem to influence NAIRU oddly enough.

	20-11-2002 20:06									#487
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quote: Originally posted by Colon So France's GDP grew by 4.2% in 2000? Interesting...

France has been doing OK. Demographics look good too.

But they seem to want to snatch defeat from the jaws of victory. 35 hour work week, retirement at 55.

	20-11-2002 20:08									#488
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So the occasional catastrophic change in the state of the economy means we have to change NAIRU. So lets never use it at all ever. Come on.

You know what I say is true........if you ditch all possible imperfect guides to practical policy making you may as well not bother with discretionary policy at all. And even Roland probably wouldn't say something that silly.

	20-11-2002 20:13									#489
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"And even Roland probably wouldn't say something that silly."

You misunderestimate him!

	20-11-2002 20:13									#490
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quote: Originally posted by DrSpike So the occasional catastrophic change in the state of the economy means we have to change NAIRU. So lets never use it at all ever. Come on.

What did they believe NAIRU in the US to be a couple of years ago? 4% of unemployment?

quote: You know what I say is true........if you ditch all possible imperfect guides to practical policy making you may as well not bother with discretionary policy at all. And even Roland probably wouldn't say something that silly.

Banning discretionary policy doesn't seem like a bad idea.

	20-11-2002 20:17									#491
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Mid '90s in the US, they must have pegged it somewhere around 4.5%, which seems about right.

The press kept referring to it, without using the term "NAIRU". It seemed like a novel concept that was being introduced. Of course, it was only a little earlier in the decade that the press started giving out the real GDP figures rather than nominal.

	20-11-2002 20:19									#492
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"If you want more detailed econometric info..."

Don't threaten me. Was a rhetorical question anyway...

The problem with the output gap is whether the uncertainty about trend growth is such that it is not just an "imperfect guide" but so unreliable as to be useless.

I would not hold that view if the assumptions can be based on longterm observations, but making output gap estimates based upon a short term spike in productivity growth that has been accompanied by suspicious developments is a huge leap of faith, not to say a gamble - and I think the FED is guilty of gambling on that.

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 ?

	20-11-2002 20:21									#493
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quote: Originally posted by Colon Banning discretionary policy doesn't seem like a bad idea.

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.

	20-11-2002 20:22									#494
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You should be more openminded, SpikeDoctor!

	20-11-2002 20:29									#495
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quote: Originally posted by DanS Mid '90s in the US, they must have pegged it somewhere around 4.5%, which seems about right.

(I'm ignoring what you wrote below that because you DanSed )

Here's a table of the NAIRU according to the CBO. (table 11)

5.9% in '90 and 4.5% now?

Following on what NAIRU Hersh asked the Eurozone has, they put it at 8% now IIRC while it was quite a bit higher in the early 90's of course. (I'll try to find the article I read it in)

	20-11-2002 20:30									#496
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quote: 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.

	20-11-2002 20:35									#497
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quote: 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)

	20-11-2002 20:37									#498
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"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.

	20-11-2002 20:43									#499
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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.

	20-11-2002 20:45									#500
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"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.

	20-11-2002 20:46									#501
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quote: 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?

	20-11-2002 20:47									#502
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"CB independency" per se doesn't put a policy on the table. What is recent history telling us about NAIRU ?

	20-11-2002 20:51									#503
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quote: 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.

	20-11-2002 20:54									#504
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quote: 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?

	20-11-2002 20:56									#505
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Again, the issue is "good guesstimate" or "bad guesstimate".

"There is no lumping together...."

Hmm... you said:

quote: 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.

	20-11-2002 20:56									#506
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quote: 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.

	20-11-2002 20:58									#507
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quote: 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?

	20-11-2002 21:02									#508
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I'll start a new one before Ming comes in and slaps us.