Tuesday, May 3, 2016

"Curve shifting??"





Oilfield Trash said...


I will make one additional comment, and sit back and see how this unfolds.

Hopefully you have a good grasp of Phillips since he believed that attempts to control the economy that relied upon the historically observed relationship could change the relationship itself

Phillips, A. W. (1968) ‘Models for the control of economic fluctuations,’ in Scientific Growth Systems, Mathematical Model Building in Economics and Industry, London, Griffin, pp. 159–65.

‘In my view it cannot be too strongly stated that in attempting to control economic fluctuations we do not have two separate problems of estimating the system and controlling it, we have a single problem of jointly controlling and learning about the system, that is, a problem of learning control or adaptive control’

Based on a posteriori information

Adaptive controller depends on very recent history

• No memory
• Reacts to current state only

Learning controller depends on long-term history

• Memory
• Remembers previous states and appropriate responses

You could say that policy which attempted to control economic fluctuations is what caused this curve shifting, I do not think Phillip would necessarily disagree with you.

I also think that if you could asked him how do we keep aggregate demand ‘at a value which would maintain a stable level of product prices’ or ‘at a value which would maintain stable wage rates’, he would most certainly say it would have required a whole host of control mechanisms to be added, to his model of the economy, let alone the real economy itself.

This whole idea there is an equilibrium ‘trade-off’ across historical time between inflation and unemployment is not IMO correct. Making dots different colors does not change this.

Although I am open to the possibility that under certain policy conditions which influence control mechanism in the economy you can produce statistical relationships between inflation and unemployment and making dots different colors may give insight to this possibility.

However, you have to focus on the control mechanisms and how the policy interaction produced the statistical relationship, and not so much on the dots.

I do not have the math chops to tackle this or offer any insightful contributions so…..

Back to Lurker mode.

The Arthurian said...

Oilfield: "This whole idea there is an equilibrium ‘trade-off’ across historical time between inflation and unemployment is not IMO correct. Making dots different colors does not change this."

Colors is a way to see if the dots cluster in different places at different times. I don't see what the objection is to that.

I don't know how long a period of time you mean by "historical" time. I'm just looking at FRED data, say since 1948.

The idea of a "tradeoff" between inflation and unemployment means that inflation numbers go down when unemployment numbers go up... and that inflation numbers go up when unemployment numbers go down...
Not necessarily one-for-one. Just tendencies. In the 1970s inflation was typically higher than unemployment. In recent years inflation has been typically lower than unemployment. That's fine, that's fine. It shows up on the graph as curves standing up (in the 1970s) and curves lying down (in recent years).

A graph is just a picture of the data. If for a point in time there is both an inflation rate and an unemployment rate, then that point can be put on the graph.

Some people want the Fed to set a higher inflation target. Why? They think it will bring unemployment down BECAUSE OF THE TRADEOFF.

The Fed itself tries to balance the inflation and unemployment sides of its mandate, because changing the one side affects the other -- BECAUSE OF THE TRADEOFF.

When you say you think the idea of the tradeoff is not correct, I don't understand what you mean. Do you think the Fed is wrong to say that its unemployment policy influences inflation? Wrong to say its inflation policy affects unemployment? Those influences, those effects -- that is the tradeoff!

The Arthurian said...

OT, just quickly: The "cause" of changes on the Phillips graph is that inflation is high (or low) or that unemployment is high (or low). The cause of inflation (or unemployment) being high (or low) has to do with policy and conditions, I'd say -- not with the graphs.

Maybe I'm completely missing the source of our disagreement. Hope not.