I frequently assert that no fiat-money central bank ever tried to inflate and failed. Some people respond by pointing to the long period of mild deflation in Japan. I won’t repeat all my arguments that the BOJ was intentionally pursuing a highly contractionary monetary policy. Instead, I’d like to cite the findings of a new study by three Japanese economists, who use a New Keynesian DSGE model to estimate the Taylor rule. The study by Koiti Yano, Yasuyuki Iida, and Hajime Wago, found that the BOJ seemed to shift from a roughly 2% inflation target in the 1980s and early 1990s, to a roughly negative 1% target after 1995.
Unfortunately, I went to grad school back in the stone age when we mostly taught economic intuition, not math and econometric skills. So I’m hoping my very smart commenters will help me out with this paper. I wasn’t quite able to figure out how they got the estimate of minus 1% inflation target. Does their method seem reasonable?
Part 2: Three from The Economist
I’ve been so busy that I haven’t had time to link to my last three essays for The Economist.
I should have an article in the National Review very soon. I’ll let you know.
Part 3: No one should pay any attention to my political forecasts.
I said Obama was unlikely to get more fiscal stimulus, and he got a lot more. I would have thought if he got a lot more, the Keynesians would have been ecstatic. Instead they are outraged. The announcement seemed to raise the expected rate of inflation by about 8 basis points per year over 5 years. There’s two ways of looking at that. On the plus side, it shows fiscal stimulus does have a positive multiplier. On the minus side, it’s not much bang for the buck, as I was under the impression that the FICA tax cut was a surprise. Real interest rates rose by 13 basis points, and nominal rates rose by 21 basis points. (So much for Ricardian equivalence.)
But I also believe Obama missed an opportunity. If you believe as I do that sticky wages explain part of the high unemployment, it would have made much more sense to cut the employer’s share of payroll taxes, not the employee share. Still, if we need to do fiscal stimulus, I favor tax cuts both for small government reasons, and for stimulus reasons. I agree with Christina Romer that tax cuts are much more stimulative than spending increases.
Part 4: The endless, pointless, debate over the EMH
A few reactions to comments on my recent post on the EMH. Some people get extremely angry when you defend the EMH. The debate reminds me of arguments I have over free will. I point out that either events have causes, or they are random. In either case there is no room for free will. My opponent responds that he is free to pick up either the salt or pepper shaker in front of him. The debate never really gets joined, and is thus largely a waste of time. I’ve decided I shouldn’t waste any more time arguing against free will, or defending the EMH.
I must have done at least 6 posts on the EMH and I always get the following responses, even if they have nothing to do with the specific arguments that I make in the post:
1. It is noted that some people correctly predicted this or that bubble. The way I look at it, you have roughly a fifty/fifty chance of being right if you predict prices will fall. Given there are 7 billion people on planet Earth, I’m not blown away by the finding that some of them predicted this or that bubble would pop. What does blow me away is that some people who have become world famous predicting bubbles, have done so despite also making important false predictions.
2. Some commenters point to anomalies. I point out the EMH predicts there will be millions of anomalies. Some respond that a few anomalies have even done well in out-of-sample forecasts. That’s great, but you’d expect that. I recall reading about studies showing many anomalies failed to do well after they were published. Was I misinformed?
3. Some point to experimental economics. I point out that studies have found experimental results do not always hold up in the real world. Some commenters found the experimental evidence against the EMH to be irrefutable. But this is also part of that evidence:
But people do learn. By the third time the same group goes through a 15-round market, the bubble usually disappears.
I’m guessing that real world traders are more savvy than college students playing a game for only the third time.
4. Don’t get me wrong, I think there is evidence against the EMH (such as the 1987 stock crash), my real argument all along has been that the anti-EMH view is literally useless. And that which has no practical value has no theoretical value. In contrast, the EMH has been very useful in my research on the Great Depression.
5. Several people mentioned market observers who denied bubbles, but no one provided me with a specific example of a bubble denier who became famous because his or her prediction was correct. During bubbles, I find all the sophisticated people I talk to are pessimists, arguing it’s a bubble and it must burst at some point. I rarely find people who say it’s going much higher. So I think a successful bubble denial ought to earn some praise from the intellectual elites. Given that pessimism is the only fashionable stance if one wants to be viewed as a SERIOUS THINKER, the bubble deniers ought to be viewed as being the ones going against the grain.
So I feel it’s hopeless, I get way more comments than I have time to answer, and only 10% or 20% actually address the specific arguments in my post. So I’ll just give up, and stop doing bubble posts. Of course as soon as I find another interesting way of denying the existence of bubbles, I’ll break my vow and post another EMH defense. After all, it can be logically shown that I don’t have any free will.
PS. I will be super busy until after New Year’s Day, not doing as much blogging. (Although I’ll try to do some.) Apologies to those who used to get Christmas cards from me. Consider this: “Merry Christmas,” to be my holiday greeting.
PPS: I just noticed that Bryan Caplan and Arnold Kling commented on my post. In response to Bryan Caplan, I think Fama became famous for inventing and defending the EMH, not making a specific correct forecast that a specific bubble would keep inflating. I don’t know the other guy. Arnold Kling’s definition of a bubble is one of many out there. My problem is not that it is wrong, but rather that even if true, it is a useless concept. I insist that unless a bubble call is an implied prediction, it is useless.
PPPS. Thanks to Yasuyuki Iida for sending me the paper. He indicated it was presented at this year’s Econometric Society World Congress (ESWC2010).