I got a request to run the model for China in an email from Jonathan Prince, so here it is. I half expected to get nonsensical results; the "conventional wisdom" in the US is that Chinese statistics are suspect (see here for example). However, after running the model using data from FRED (derived from OECD and IMF data), it turns out that aside from potentially understating inflation in the late 90s/early 2000s, the results for China are largely in line with other countries. Here are the NGDP-M0 and P-M0 plots I've been showing lately with China added:
Here is the actual model fit with parameters (everything below shows model calculations in blue and data in green):
You can see the understatement of inflation in 1999-2000. The information transfer index is high, but constant, meaning that the Chinese economy roughly follows something like the quantity theory of money (however the rate of change of the price level is smaller than the rate of change in the money supply, i.e. log P ~ k log M0 with k < 1):
Due to the seasonal effects and the lack of quarterly NGDP data or "core" CPI data, the year over year inflation is a bit noisy, but the model seems to give us something that looks like "core" CPI:
Again, inflation seems to be understated in 1999-2000. Overall, China seems like a pretty typical high-growth large economy, like the US in the 1960s.
Update 14 January 2017
There might be some issues with the unemployment rate data, however.
Update 14 January 2017
There might be some issues with the unemployment rate data, however.
Jason, can you add a curve for Democratic Kampuchea from April 1975 to January 1979. Thanks.
ReplyDelete... ;^)
Ha!
DeleteThey apparently abolished money so the information transfer model wouldn't work as well.
Jason, thanks so much for running the numbers for China through the model. I am still working my way through the history of the blog thus far and dusting off more than a few cobwebs along the way, however, in a similar vein to the post on Canada and given the numbers for China "seem just fine" are you able then to use the model to forecast for example the tipping point into an information trap/LT situation. Or perhaps add your two cents to the ongoing debate about how sustainable the current growth rate is? (Jon Prince)
ReplyDeleteCertainly. I will try to have a post up about that in the next two or three days.
DeleteThe Economist says China overstated inflation in the late 1990s. What gives?
ReplyDeleteHello,
DeleteI'm not sure I understand your question. The model above really only addresses data after the 1990s (1999-2000 is the only data point from that period). Although I'd like to see data from that period if you know where to find it.
Would love to see broad money growth or govt revenue growth vs Nominal gdp
ReplyDeleteHi Andrew,
DeleteBroader measures of money -- for example M2 -- tend to be proportional to NGDP in other countries. You end up with a straight line, and the two measures don't represent different information. Another thing is that using broader measures of money like M2 do much worse at predicting inflation. They're much noisier:
http://informationtransfereconomics.blogspot.com/2013/07/all-your-base.html
Likewise, government revenue in the US tends to be proportional to NGDP, averaging about 18-22 percent of NGDP. That's actually more stable than the employment-population ratio!
https://research.stlouisfed.org/fred2/graph/?g=1Vv2