Warning: The first question is tricky. But I’ve noticed that economic blog readers are very smart, and I have confidence that you will get it right.
1. Take a look at “Figure 1” in this Mark Thoma post. According to the BEA, did housing prices reach a peak near the end of 2006? If not, about when did they peak?
2. Use the answer to question 1 to figure out why I think BEA inflation figures are worthless. Hint; housing is nearly 40% of the core CPI. Fortunately, it is only 18% of the PCEPI.
3. Is there any other nominal aggregate that might give a more accurate reading of the timing and scale of nominal shocks hitting the US economy?
4. The ECB is proud of their recent success in keeping inflation low and stable. Does this imply they believe Europe was not adversely affected by the worldwide collapse in AD that began in August 2008?
I will provide my answers tomorrow night in an update. Those who aren’t longtime readers may be surprised by some of the answers.
Update 4/7/10:
See, I knew you guys were smart. Declan nailed it with the very comment.
A few comments:
Declan is right that the monthly changes over the last year would be below the 12 month changes. This is the “average/marginal” distinction that you may recall from drawing demand curves and marginal revenue curves. When the 12 month average is falling at a steady rate, the marginal monthly change is lower, and falling more rapidly. When there is a “kink” in the rate of decline, as in about May 2009, then the monthly numbers must have fallen discontinuously to a much lower level. It looks to me like the monthly numbers went negative in the second half of 2009″”so I’d guess housing prices peaked about that time.
2. So the BEA said housing prices were rising 2006-09, right through the biggest house price crash in American history. And now that house prices are actually rising, they show them falling. Not good for a product that is 40% of the core CPI. The basic problem is that flaws in BEA procedures make it look like prices respond with a long lag to monetary shocks. There actually is some lag due to some prices being sticky, but much less than the BEA data suggests.
3. NGDP.
4. Yes, for the following reasons:
a. The ECB is able to influence AD, not AS.
b. If they target inflation, presumably they believe that inflation is the appropriate indicator of whether AD is higher or lower than desired.
c. If they have hit their inflation target, then they presumably believe AD is at the appropriate level.
d. If they don’t believe AD is at the appropriate level, but they are fine with the current inflation rate, then they should not be targeting inflation.
In my view, answer “d” describes the actual situation in the Eurozone. For instance, the Eurozone has done fiscal stimulus, which makes no sense if inflation is on target.