Monday, June 30, 2014

Output and price level behavior across several economies

I thought I'd aggregate the price level vs monetary base (which I've shown before at this link) and nominal output vs monetary base data into graphs and compare them with their expected behavior in the information transfer model (using 100 aggregated economies each built from 100 random markets based on the results at this link).

The result is pretty remarkable:

Note that this not only reproduces the relative curvatures of the theoretical graphs, but their variance (the nominal output vs monetary base being a tighter curve than the price level vs monetary base). Another interesting aspect is that the overall behavior only becomes apparent when looking at the time series for many countries.

This model unifies "the Great Stagnation"/"secular stagnation" and "neo-Fisherite" models in a larger synthesis. The slowing of economic growth and prolonged low interest rates leading to lower inflation are two facets of the same general behavior of economies. The concept of convergence (smaller economies experiencing "catch-up" growth) also falls under this general behavior.


  1. Replication anon here..

    a) Publish!

    b) Would it be safe to say that given the current state of thinking in monetary+fiscal policy circles, we're heading for a period of continued low growth + zero-to-negative inflation (deflation)? Policy makers are going to resist jumping on the fiscal bandwagon, we're not going to "exit through hyper-inflation", and continued base increases can end up being counter-productive...

    c) A simple trade-able idea behind all this could be to long countries on the QTM side of the chart and short those who are on the upper kink.. expressed through some rates product perhaps. Need to think about that one some more though..

    1. Regarding b) I would say that "status quo bias" in fiscal/monetary policy would lead to a long period of stagnation in this model.

      Regarding c) that could potentially work, except that e.g. the Federal reserve keeps predicting that growth will fall short in its potential growth forecast (to the consternation of e.g. Scott Sumner). It's possible secular stagnation is "priced in" already even if dominant theoretical paradigms aren't up to date (an example of wisdom of crowds?). There are also some hardships faced when shorting the market:

    2. The shorts link is on point for stocks, but it takes a stronger stomach than mine to express macro views through equity :) You'd want something cleaner like eurodollar/eurokitchensink futures or bond futures - at which point those previous concerns are reduced greatly :)

  2. Jason, is it possible to analytically calculate or estimate standard deviations at each point (on your theoretical curves)?

    1. Yes; I was planning on doing that in order to compare with the data to support my "variance" assertion in the post.


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