LANCELOT: This could be the sign that leads us to the Holy Grail! Brave, brave Concorde! You shall not have died in vain!CONCORDE: Uh, I'm-I'm not quite dead, sir.LANCELOT: Well, you shall not have been mortally wounded in vain!CONCORDE: Uh, I-I think uh, I could pull through, sir.LANCELOT: Oh, I see.CONCORDE: Actually, I think I'm all right to come with you--LANCELOT: No, no, sweet Concorde! Stay here! I will send help as soon as I have accomplished a daring and heroic rescue in my own particular... (sigh)CONCORDE: Idiom, sir?LANCELOT: Idiom!CONCORDE: No, I feel fine, actually, sir.LANCELOT: Farewell, sweet Concorde!CONCORDE: I'll-uh, I'll just stay here, then, shall I, sir? Yeah.
John Handley asks on Twitter for a post on the successful predictions from the ITM for Japan in response to Noah's quite excellent Bloomberg View piece with a nice title: An Economics Lab Where Theories Go to Die.
I'm on business travel right now (finally going home tomorrow), so I'll just put up some pictures with some links.
First, I'd like to add my own example where Japan kills a theory (well, market monetarism is technically unfalsifiable, so this is really just a reductio ad absurdum where market monetarists don't think the conclusion is absurd):
Tuesday, October 7, 2014
Here's one from 2013 (!) describing the falling interest rates in Japan:
Sunday, September 15, 2013
And here is one from 2014 (!) showing the long term rates -- one that I used to question Noah Smith's declaration that Abenomics was a success (apparently fooled by the temporary increase due to the VAT increase in 2014):
Friday, June 13, 2014
The most recent updates to the model predictions can usually be found at this link; here is the inflation rate and the price level as of the beginning of 2016 -- using a forecast started in 2014:
There's also this post where I make an information equilibrium model that couples inflation to labor force growth:
Friday, January 22, 2016
Here were the graphs for Japan (Canada and the US were also at the link):
One last thing -- Noah mentions Williamson's and Cochrane's neo-Fisherism:
The one theory I know of that seems to do a decent job of explaining Japan -- at least, in a rough, basic sort of way -- is Neo-Fisherism, the radical monetary theory being promoted by economists John Cochrane and Stephen Williamson. This idea holds that low interest rates, if they continue long enough, cause inflation to fall rather than rise. Japan’s recent experience matches this. Neo-Fisherism has so far been rejected by many mainstream theorists, but Japan could provide support for Cochrane and Williamson’s rebellion.
One thing that I pointed out back in July of 2013, before Noah came up with the neo-Fisherite moniker the next summer (here's my post from May 2014), was what I called the "diminishing marginal utility of monetary expansion" -- that the inflation tends to tends to first rise when the IT index is not 1 (nowadays I define the IT index such that this means IT index k > 1) and then fall over time as it approaches 1. If you pair this result with interest the interest rate model, you get a case where (today) both interest rates and inflation will fall with monetary expansion.
[Added 10pm] One of the reasons for the success of the IT model to explain Japan (as well as the US) is that it incorporates this "neo-Fisherism". It's not exactly the same thing -- the key point is that monetary expansion tends to raise output, but at a slower and slower rate as the economy expands. Interest rates go up with NGDP (income effect), but down with monetary expansion (liquidity effect). Initially, monetary expansion causes NGDP to grow because the income effect dominates (quantity theory of money -- the 1960s and 70s), but as monetary expansion has less and less effect over time, you eventually get the liquidity effect dominating, a turnaround, and a trend towards lower interest rates. The last time this happened, we got the Great Depression and wartime hyperinflation "reset" the system (coming from a different cause than monetary expansion such as supply shocks or pegged interest rates).
Anyway, here is a more recent post on Cochrane and illustrating those interest rate dynamics:
Monday, October 19, 2015
This animation came a month later (for some reason):
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