Two identification problems

In an earlier post I mentioned my favorite Mankiw homework problem, which mysteriously disappeared from his textbook a few editions back.  In the question a group of French wine executives were concerned that champagne prices had been rising, and feared that the higher prices would cause a drop in sales.  It seems the industry group’s ad campaign had been so popular that demand for champagne had skyrocketed.  Students were asked to criticize their logic.

Of course their mistake is confusing shifts in demand with changes in quantity demanded in response to a price increase.  I asked Mankiw why the problem had been dropped, and he said that he did not recall the reason, but generally changes were made in response to instructor feedback.

When I am feeling especially cynical I wonder whether instructors thought it might be too “confusing” to actually teach S&D correctly; and instead preferred to stay in the student comfort zone where higher prices cause less consumption.

[In case you had the wrong kind of instructor, the correct answer is that a higher price is just as likely to cause more quantity supplied, which means more consumption, ceteris (supply) paribus.]

I was reminded of this when I read the WaPo article that I dissected in the previous post:

Another risk is that global investors could lose faith that the Fed will be able or willing to pull money out of the economy in time to prevent inflation. That would lead the investors to demand higher interest rates on long-term loans, which could reverse the rate-lowering effects of the Fed’s asset purchases.

Let’s hope Nick Rowe was not holding any sharp objects when he read this.  That’s right, the risk is that more AD would cause higher rates, which could cause . . . less AD.  But as I learned from my principles students, we don’t have to stop there.  The lower AD will lower interest rates, which will boost AD.  Unfortunately that will boost interest rates again and reduce AD, and we will end up in some sort of vicious cycle.  Or something like that.  Let’s hope this is the WaPo and not some unnamed policymaker at the Fed.  (Maybe the official studied economics with the newer version of Mankiw’s text, and never saw the champagne problem.)

So that’s the indentificati0n problem in a nutshell.  Are lower rates good news; a sign of easier money?  Or are they bad news; a sign of a weakening economy?  As usual in economics, it depends.  But on average it is bad news, as interest rates tend to be quite procyclical.

I thought of this example recently when I was reading the bearish Telegraph article that I linked to a few posts back.  The article mentioned that hourly wage rates had fallen 0.1% in the most recent month.  This reminded me of the frequent comments I get in response to my advocacy of the sticky wage theory of the cycle.  People will point to examples of falling wages, as if a sticky-wage theorist like me should regard that as good news.  In fact, it is usually bad news, but sometimes good news.  It depends.

Because this is confusing, I’ll explain it with a simplified example.  Suppose everyone works on 12 month wage contracts, and there are no sectoral shocks, only aggregate shocks (nothing important would change if you relaxed this assumption.)  Each month 1/12th of the contracts are renegotiated.  In most cases the wage stays the same, but every so often there is a 1.2%, 2.4%, or 3.6% nominal shock, which causes wages to rise or fall by that amount.  In each case only 1/12 of all wages adjust right after the shock, and the other wages gradually adjust over a year’s time.  If you go from 0% aggregate wage changes to a sudden 0.1% rise or fall, you know the economy was hit by a 1.2% nominal shock, and you know the other 11/12th of wages are temporarily 1.2% out of equilibrium.  But if you see a sudden 0.3% nominal wage change, you know the economy was hit by a 3.6% nominal shock.

In the example provided, the bigger the wage change the bigger the nominal shock, and the larger the disequilibrium in the rest of the labor market.  So falling wages isn’t good news, it is an indication of bad news.  And the bigger the fall, the worse the news.

Now let’s consider a case where the nominal shocks are the same, but the wage flexibility is different.  In 1921 and 1930 the US was hit by big deflationary shocks.   But because Hoover strong-armed the bigger firms to maintain high wages in 1930, wages fell much more rapidly in 1921 than 1930.  In that example the different results reflected differing degrees of wage flexibility, not the size of the nominal shock.

During my lifetime I think the first example is more applicable.  Wage stickiness is something like gravity–it’s there, but we can’t do much about it.  It is the nominal shocks that vary.  In this world it is usually true that the bigger the fall in wages the worse the shock.  Falling wages aren’t primarily a sign of an economy mending itself; they are an indication of a labor market that is out of equilibrium.  Of course eventually falling wages will heal the labor market, but as long as they are falling the market is in disequilibrium and we shouldn’t expect a satisfactory recovery.

It seems to me that this is exactly like interest rates.  Most people think low interest rates are good news, a sign of monetary ease.  They could be, but are usually bad news, a sign of a weak economy.  Most people assume the sticky wage model implies falling wages are good news, a sign the labor market is healing.  They could be, but more often are an indication of falling NGDP pushing non-adjusted wages ever further from equilibrium, and hence are bad news.  In both cases, for a given level of NGDP, lower interest rates and lower wages should boost production.  But it is very, very dangerous to draw inferences from a price, as the price change often reflects changes in NGDP. 


Tags:

 
 
 

33 Responses to “Two identification problems”

  1. Gravatar of Benjamin Cole Benjamin Cole
    8. July 2010 at 14:35

    Right.

    I wonder if you could comment on the supply of capital–ie, high global savings rates and accumulation of huge pools of capital.

    Might that be “tricking” observers into thinking there is easy money when there is not?

  2. Gravatar of Doc Merlin Doc Merlin
    8. July 2010 at 14:50

    @Cole:
    “I wonder if you could comment on the supply of capital-ie, high global savings rates and accumulation of huge pools of capital.

    Might that be “tricking” observers into thinking there is easy money when there is not?” ‘

    In the Austrian Business Cycle Theory, excessively low interest rates will lead to excess capital accumulation. Then during the Austrian crash, money looks loose to those that only watch interest rates, because asset prices collapse leading to low interest rates (from a demand side). This leads to an odd situation with low interest rates, price deflation, and RGDP loss. Yet another reason why it isn’t good to say low real rates = loose policy.

    While it would be easy to blame the fed for this in the last decade, I think a lot of the blame rests with Japan who, instead of implementing badly needed supply side reforms, has been goosing AD hard since the 90’s.

    Also, if Japan’s experience is a good example, it isn’t good enough for the central bank to cut interest rates, to fix things again.

  3. Gravatar of Doc Merlin Doc Merlin
    8. July 2010 at 14:54

    Scott… this sort of idiocy happens to often. I share your frustration!

    Government officials need this tattooed onto their foreheads.

    “Prices are just a signal and an equilibrium, they don’t cause the changes, it is the supply and demand that cause changes.”

    Too wordy? maybe we could shorten it.

  4. Gravatar of Doc Merlin Doc Merlin
    8. July 2010 at 14:54

    s/to/too/

  5. Gravatar of JimP JimP
    8. July 2010 at 15:47

    http://yglesias.thinkprogress.org/2010/07/fed-can-act-by-shaping-expectations/

    A Yglesias post that Scott could have written.

    And in the middle, a link to a paper written by Bernanke, while he was (is) Chairman of the Fed, saying exactly what he should do – should have done and should do NOW.

    Yglesias quotes the following from the paper.

    begin quote
    In effect, public statements by the central bank may foster the expectation that it intends to follow what [Gauti Eggertsson and Michael Woodford] refer to as optimal monetary policy under commitment rather than prematurely remove policy accommodation in the future (as happens in EW’s no-commitment case). The expectation that the nominal short-term rate will be kept sufficiently low for long enough to ward off deflation should also prevent inflation expectations from falling, which would otherwise raise real interest rates and impose a drag on spending. Because interest rate commitments have implications for inflation expectations in equilibrium, our description of policy in terms of expected interest rate paths is closely related to the types of policies analyzed by Paul Krugman and Lars Svensson.
    end quote.

    Exactly right Ben.

    NOW DO IT

  6. Gravatar of JimP JimP
    8. July 2010 at 15:51

    Or almost exactly right.

    Lifting interest on reserves would be better – along with price level targeting.

    Come on Ben. Do it.

  7. Gravatar of JimP JimP
    8. July 2010 at 16:42

    Another quote from the above linked Bernanke paper.

    begin quote (page 8)
    Shaping policy expectations
    Commentators often describe the stance of a central bank’s policy in terms of the
    level of the short-term nominal interest rate. For example, the very low short-term rates
    seen in Japan in recent years have led many to refer to the Bank of Japan’s monetary
    policy as “ultra-easy.” However, associating the stance of policy entirely with the level
    of the short-term nominal interest rate can be seriously misleading. At a minimum, a
    distinction needs to be drawn between the nominal short-term rate and the real short-term
    rate; in a deflationary environment, a nominal interest rate near zero does not preclude
    the possibility that real interest rates are too high for the health of the economy.
    A more subtle reason that the level of the policy rate does not fully describe the
    stance of monetary policy is that a given policy rate may coexist with widely varying
    9
    configurations of asset prices and yields, and hence with varying degrees of policy
    stimulus broadly considered. In the United States, at least, the short-term policy rate has
    little direct effect on private-sector borrowing and investment decisions. Rather, those
    decisions respond most sensitively to longer-term yields (such as the yields on mortgages
    and corporate bonds) and to the prices of long-lived assets (such as equities). A given
    short-term rate may thus be associated with relatively restrictive financial conditions (for
    example, if the term structure were sharply upward sloping and equity prices depressed),
    or alternatively with relatively easy conditions (if the term structure were flat or
    downward sloping and equity prices high). Indeed, copious research by financial
    economists has demonstrated that two and possibly three factors (sometimes referred to
    as level, slope, and curvature) are needed to describe the term structure of interest rates,
    implying that the short-term policy rate alone can never be sufficient to describe fully the
    term structure, let alone the broad range of financial conditions.
    Financial theory also tells us that the prices and yields of long-term assets, which
    play such an important role in the transmission of monetary policy, depend to a
    significant extent on financial market participants’ expectations about the future path of
    short-term rates. In particular, with the relevant term, risk, and liquidity premiums held
    constant, expectations that short rates will be kept low will induce financial market
    participants to bid down long-term bond yields and (for given expectations about future
    corporate earnings) bid up the prices of equities. Because financial conditions depend on
    the expected future path of the policy rate as well as (or even more than) its current value,
    central bankers must be continuously aware of how their actions shape the public’s policy
    expectations. The crucial role of expectations in the making of monetary policy, in
    10
    normal times as well as when the policy rate is near the zero bound, has recently been
    stressed in important papers by Eggertsson and Woodford (2003a,b). Indeed, in the
    context of their theoretical model, Eggertsson and Woodford (henceforth EW) obtain the
    strong result that shaping the interest-rate expectations of the public is essentially the
    only tool that central bankers have””in normal conditions, as well as when the ZLB
    binds. We will have several occasions to refer to the EW result below and opportunities
    to suggest that the levers of policy are greater in number than they contend.
    end quote

    Maybe Scott helped write the paper (just kidding). But clearly Ben does not think that low rates must mean easy money – and he is well aware of the role of expectations.

    here is the paper

    http://www.federalreserve.gov/pubs/feds/2004/200448/200448pap.pdf

  8. Gravatar of Doc Merlin Doc Merlin
    8. July 2010 at 16:46

    @JimP
    Bernanke still makes a noobie mistake and confuses low price with high supply. He is better in that he actually takes real interest instead of nominal interest, but still, you cannot argue from price, even across different terms and term structures.

  9. Gravatar of Declan Trott Declan Trott
    8. July 2010 at 17:14

    “But because Hoover strong-armed the bigger firms to maintain high wages in 1930, wages fell much more rapidly in 1921 than 1930. In that example the different results reflected differing degrees of wage flexibility, not the size of the nominal shock.”

    Picking up on your previous response, I’ll take your word that nominal wages fell slower in ’30 than ’21. But it is a big jump to say that this stickiness explains the difference between ’30 and ’21 (or, as you say in your earlier post, that it was a “big problem”).

    C&O: “The real manufacturing wage, on average, was roughly 5 percent above trend during 1930-33 and about 1 percent above trend during the Depression of 1921-22. . . . Given our measure of the wage from the manufacturing sector, our benchmark model shows that this wage accounts for about a 3 percent decline in output at the trough of the Great Depression, compared to an actual 38 percent decline.” (http://minneapolisfed.org/research/sr/sr270.pdf) They say even their own model result is too big because of composition bias in the real wage measure. Their subsequent work (and all the evidence you have presented on the blog) focuses on real wages as a factor in the slow recovery after ’33, not the ’29-’33 downturn.

    BTW, more power to you on the Fed post! (I was just listening to Kling on EconTalk and he said the interest on reserves was a backdoor bailout of the banks, which makes as much sense as anything.)

  10. Gravatar of Ian Dew-Becker Ian Dew-Becker
    8. July 2010 at 17:22

    Could you provide a cite for the claim that interest rates are quite procyclical? I think you’re generally right perhaps since 1990, but before that, I thought they were mostly acyclical. (btw, I’d like interest rates to be procyclical as it would fit with my view of the world, but I’ve failed to find terribly good evidence in my favor).

  11. Gravatar of Joe Joe
    8. July 2010 at 18:59

    Professor Sumner,

    In Mishkin’s textbook, he discusses the interest rate yield curve and liquidity premium as a tool of forecasters, I quote…

    “The ability of the yield curve to forecast business cycles and inflation … is often viewed as a useful indicator of the stance of monetary policy, with a steep yield curve indicating loose monetary policy and a flat or downward sloping yield curve indicating tight policy.”

    Is this precisely what you’ve been talking about all along, that low interest rates are usually a sign of tight money, not loose!

    Also, on page 109, he uses this exact idea to explain why low interest rates in Japan in the 90s and 2000s were precisely a terrible sign, and only when interest rates go up will it mean the economy is recovering. Just thought I’d throw that out there.

    Best,

    Joe

  12. Gravatar of JimP JimP
    9. July 2010 at 00:54

    and here we have a direct call for price level targeting.

    http://www.realclearmarkets.com/articles/2010/07/09/how_to_exit_liquidity_traps_98563.html

  13. Gravatar of JimP JimP
    9. July 2010 at 06:14

    Scott is quoted here:

    http://www.capitalspectator.com/archives/2010/07/talking_up_defl.html

  14. Gravatar of JimP JimP
    9. July 2010 at 06:24

    And a link from Kling

    http://econlog.econlib.org/archives/2010/07/an_assignment_f.html

  15. Gravatar of Gregor Bush Gregor Bush
    9. July 2010 at 06:53

    “Another risk is that global investors could lose faith that the Fed will be able or willing to pull money out of the economy in time to prevent inflation. That would lead the investors to demand higher interest rates on long-term loans, which could reverse the rate-lowering effects of the Fed’s asset purchases.”

    It’s amazing how pervasive this view is. I was recently debating the likely impact of further Fed monetary stimulus with a Wall St. strategist. He didn’t think further monetary action could be effective because Treasury rates were already so low. I argued that if the Fed surprised the market and announced a Treasury purchase plan that the market expected to be effective, that Treasury yields would actually rise and the prices of risky assets (stocks and high yield bonds) and commodities would rise as well.

    He couldn’t understand how the Fed buying Treasuries could possibly lead to lower prices/higher yields or how these higher Treasury yields could possibly be stimulative. I kept telling him that it wasn’t the higher Treasury yields that was stimulative it was the change in expectations (that caused Treasury yields rise and equity prices to increase) that was stimulative. I think he thought I was crazy.

  16. Gravatar of JimP JimP
    9. July 2010 at 08:15

    Good lord – I hope someone in the White House reads this:

    http://yglesias.thinkprogress.org/2010/07/james-bullard-should-act-right-now/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+matthewyglesias+(Matthew+Yglesias)

  17. Gravatar of Morgan Warstler Morgan Warstler
    9. July 2010 at 11:53

    Yet another proof point, that a nice big crisis GUTS Public Employees and we are not as dumb as our grandparents int he recession:

    http://www.northjersey.com/news/politics/070910_Christie_looks_to_privatize_motor_vehicle_inspections.html

    Germany is turning around.

    Ireland is turning around.

    Question: Scott, what will you do if austerity works? How will you change your thinking?

  18. Gravatar of johnleemk johnleemk
    9. July 2010 at 12:19

    Morgan,

    Scott supports fiscal austerity. What he’s saying is that it’s irresponsible for the monetary authorities to seek out tight money for its own sake.

  19. Gravatar of johnleemk johnleemk
    9. July 2010 at 12:43

    JimP,

    I hope so too. The quality of the comments surprised me — some people got it immediately. But there were far too many people fretting about the zero bound, complaining that the financial system is too broken to transmit the effects of a monetary base increase, and insisting that fiscal policy is the only way forward. Quite depressing.

  20. Gravatar of JimP JimP
    9. July 2010 at 13:42

    Money is tight tight tight.

    http://macromarketmusings.blogspot.com/2010/07/what-is-current-stance-of-monetary.html

    And many on the Fed could care less.

    http://economistsview.typepad.com/timduy/2010/07/what-is-the-threshold-for-more-fed-action.html

  21. Gravatar of scott sumner scott sumner
    9. July 2010 at 14:20

    Benjamin, That is possible, and it might have also been a factor in 2003.

    Doc Merlin, You said;

    “In the Austrian Business Cycle Theory, excessively low interest rates will lead to excess capital accumulation.Then during the Austrian crash, money looks loose to those that only watch interest rates, because asset prices collapse leading to low interest rates (from a demand side). This leads to an odd situation with low interest rates, price deflation, and RGDP loss. Yet another reason why it isn’t good to say low real rates = loose policy.”

    That’s right. But I think it is supposed to be interest rates that are lower than the natural rate. Prices and interest rates by themselves don’t cause anything, they are caused by other factors (saving, monetary policy, inflation, etc.)

    Japan has had an expansionary fiscal policy, but monetary policy has been very tight.

    JimP, Thanks for the links. I noticed that soon after Yglesias did quote me, but he said my posts were too long 🙁

    Declan, I don’t buy the C&O data. I found that real wages rose in 1921 by more than any other year of the 20th century (deflating by the WPI.) I believe they deflated wages by the GDP deflator, or the CPI.

    In my depression study I found that real wages were extremely countercyclical during the interwar years. I have a graph that shows this relationship which I posted back in March or April. It is very clear, even in the early 1930s.

    Ian, Sorry, I don’t have a cite. But I think it is generally accepted that rates tend to fall sharply in recessions. That was certainly true in the interwar years, and it has been true for the cycles during my adult life.

    Joe, I think his point is slightly different. He argues that an inverted yield curve is bearish. That means high short term rates and low long term rates. But it does imply that short term interest rates tend to fall in recessions, if that is what you meant.

    Gregor, I share your frustration.

    JimP. I hope so too. I wish they had thought of this 18 months ago.

    Morgan, Austerity has already failed. Austerity produced a recession we didn’t have to have. Germany and Ireland are doing much worse than we are.

    Johnleemk, I agree.

  22. Gravatar of scott sumner scott sumner
    9. July 2010 at 14:24

    JimP, The bloggers get it, but the Fed presidents seem clueless.

  23. Gravatar of Dirk Dirk
    9. July 2010 at 14:50

    Scott,

    Does sticky wage theory require long term employment contracts, such as in your example? It makes me wonder what percentage of workers in the US actually have such contracts. Also, if it does require long term contracts, it seems it would be easy to test the theory by comparing employment changes in industries which mainly do/don’t have such contracts.

  24. Gravatar of Doc Merlin Doc Merlin
    9. July 2010 at 15:22

    ‘That’s right. But I think it is supposed to be interest rates that are lower than the natural rate.’

    Yes, that is what I meant by excessively low.

    Prices and interest rates by themselves don’t cause anything, they are caused by other factors (saving, monetary policy, inflation, etc.)’

    Yes, couldn’t agree more. With the exception that forcible government actions to distort prices can still cause problems by screwing up the signals.

    @Scott, Morgan
    ‘Morgan, Austerity has already failed. Austerity produced a recession we didn’t have to have. Germany and Ireland are doing much worse than we are.’

    If by that you mean fiscal austerity, I have to completely disagree. Ireland is doing pretty badly (they had an even bigger real estate bubble than we did), but Germany seems relatively great right now. It has far lower unemployment than us (traditionally Germany has higher) and it is experiencing decent growth. The facts say you are wrong on this one.
    If you mean monetary austerity, German monetary austerity is causing all sorts of problems in the EMU outside of Germany. But it seems fine within Germany.

    Also, I would like to add that I think Tyler’s point about the central bank being the second mover is a good one. Fiscal stimulus tends to get canceled out by the bank, so monetary stimulus is more likely to work.

  25. Gravatar of Declan Trott Declan Trott
    9. July 2010 at 16:38

    “Declan, I don’t buy the C&O data. I found that real wages rose in 1921 by more than any other year of the 20th century ”

    Do you mean 1931? ’21 would undermine your argument wouldn’t it?

    And you’re right, they used the GNP deflator, and also detrended by 1.4% p.a.

    BTW I have JSTOR access so if I should just be reading a particular paper of yours I’ll shut up!

  26. Gravatar of JimP JimP
    9. July 2010 at 17:19

    Here David Beckworth quotes from that Bernanke paper I cited from previously – about the method and results of the 1933 Roosevelt monetary action. He calls for a “regime change” at the Fed. – and boy do we ever need one.

    http://macromarketmusings.blogspot.com/2010/07/what-can-fed-do-now_09.html

    Ben very obviously knows what to do.

    DO IT BEN

  27. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. July 2010 at 18:39

    Morgan & Doc Merlin

    Germany had no housing bubble: I suggest that makes a difference. Also, Germany’s long-term demographics are not conducive to encouraging confidence in the long-term value of its government debt, so its fiscal options are more limited, as “Spengler” has pointed out.

  28. Gravatar of spencer spencer
    10. July 2010 at 05:50

    In a recession don’t you also have to look at the demand for labor as a downward shift in the demand curve rather than a movement along the curve?

    I’ve always thought that the reason firms cut labor when demand fall rather than wages is if the demand for widgets falls from say 150 to 100 the marginal revenue of the workers producing widgets 100 to 150 falls to zero. If their marginal revenue is zero you also have to cut their marginal product to zero, i.e., fire them. Meanwhile the marginal revenues of the workers producing widget 0 through 100 remains the same so their is no reason to cut their wages.

    In microeconomics if you analyze this as a movement along a demand curve you assume that lower wages will generate higher sales. But this is just an assumption that may be true in theory. But in macro economics where you shift to a lower demand curve rather than move along a curve the assumption that lower prices leads to expanded sales does not apply.

    What is wrong with this line of thought?

  29. Gravatar of scott sumner scott sumner
    10. July 2010 at 05:56

    Dirk, No it doesn’t require long term wage contracts, that’s just the easiest assumption. And no, it doesn’t imply that unemployment will be higher in sticky wage industries, as flexible wage industries may produce more cyclical goods.

    Sticky wages in one sector can cause unemployment in flexible wage sectors.

    Doc Merlin, I agree with Tyler. Last year I did a post arguing that there is no such thing as a “fiscal multiplier” as the monetary authority moves last and determines NGDP growth.

    Declan, No, I mean 1921. Yes I see why you think it undermines my argument. What happened is that nominal wages fell sharply, but the WPI fell much more sharply in 1921. If you take the two year period 1929-31 and compare to 1920-22, then it would probably reverse. I am pretty sure that real wages rose much more sharply in 1929-31 than 1920-22. The 1921 depression was very deep, but very short.

    JimP, Thanks for the link

    Lorenzo, I agree.

  30. Gravatar of ssumner ssumner
    10. July 2010 at 07:01

    Spenser, I agree that in nominal terms the demand for labor shifts left in a recession, and because wages are sticky this causes unemployment. If wages weren’t sticky you would stay at equilibrium (no involuntary unemployment), but the level of employment would drop.

    It is true that MR can be negative, but not very often and not in equilibrium.

  31. Gravatar of spencer spencer
    10. July 2010 at 07:10

    In my analysis I am talking about real demand shifting down not nominal.

    How can you get a drop in employment and no involuntary unemployment? Remember, I am talking about the entire economy, not one firm.

    What happens to the extra labor that lost their jobs?

    I did not suggest that the marginal revenue is negative.
    I said it became zero?

  32. Gravatar of Declan Trott Declan Trott
    10. July 2010 at 16:54

    So you are saying that C&O underestimate real wage increases in both the 20s and 30s because they use the deflator instead of the WPI? And that once you use the WPI the increases are big enough to explain the unemployment in each case, and also match the relative size and duration (20s sharp but short, 30s prolonged)?

    I am still struggling to follow your claim that increased wage stickiness in the (Hoover) 30s was a major cause of why that depression was “Great” and the 20s weren’t.

  33. Gravatar of scott sumner scott sumner
    11. July 2010 at 09:25

    Spenser, A real drop in labor demand is possible, but this post was trying to explain why nominal shocks matter. Nominal shocks don’t cause real drops in labor demand. Even the assumption of zero marginal revenue product of labor seems extreme to me, although I am not denying that it may happen on occasion. But I doubt it is the norm.

    Declan, Yes, I think if one uses the WPI one gets a much closer fit. But I am not an expert on the 1921 case, so I can only say that it does explain the 1930s very well. I do know that nominal wages fell much faster in 1921 than 1930; the reason real wages still rose sharply in 1921 was the extreme fall in the WPI.
    Check out this post:

    https://www.themoneyillusion.com/?p=4220

Leave a Reply