Wednesday, May 14, 2014

Switzerland and Sweden

I ran the models for Switzerland and Sweden, the latter because of a comment by Tom Brown here. Neither seem like particularly remarkable cases, and the results fall in line with the results from other countries:


Here is are the model fits for Sweden:


Two major issues. One, the monetary data from Sweden includes an expansion of reserves in the early 1990s that messes with the price level plot. It is supposed to be 'M0' currency in circulation through out, but in the early 1990s the reserves are included (best to ignore the big bump in the early 1990s). Two, Sweden seems to have suffered from interest rate importing (by holding large amounts of foreign currencies) similar to the case in Australia (from the US and UK) in the 1980s, making the monetary base a bad fit to short term interest rates.

To answer Tom's question: negative IOR doesn't appear to impact the data much. It may have prevented deflation (from Sweden's reduction in outstanding currency). Anyway, this should be considered and update to this result (which incorrectly used the full monetary base instead of just the currency component).

Here are the model fits for Switzerland:


One problem is that currency component information is available only through 2006 (from the Swiss central bank), while monetary base data from FRED goes until today. Switzerland also appears to suffer from interest rate importation in the 1980s.

17 comments:

  1. Jason, thanks for taking a look at this.

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  2. In the 1st plot, the red curve labeled CH is Sweden and the blue curve labeled SE is Switzerland?

    Is it possible to incorporate this "interest rate importation" effect into your model?

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    1. Other way around. I used the internet domains to label them along side a color from their flags.

      And I did look at the effect a little in this post

      http://informationtransfereconomics.blogspot.com/2013/10/resolving-australian-interest-rate.html

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  3. If Sweden is SE, then it should have not trouble hitting its inflation target instead of experiencing deflation (as I understand it's currently experiencing), true?

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    1. Actually, they've been decreasing the currency component of their base ... That would create deflation in the ordinary way. It appears to be ordinary tight money (remarkably).

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    2. That must be why Lars Svensson is not happy with the Riksbank.

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  4. Jason, in the interest rate plot for Switzerland (lower right corner), you've gone t a new scheme for the lines. The light violet colored one is the model? While the dark blue one is the actual rate? You mention interest rate importation in the 1980s, and problems with data past 2006, but from 1990 to 2005 there seem to be some significant discrepancies between the two curves. Any idea why?

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    1. The dark blue one is the model -- it was an older plot with different colors.

      And yes there seem to be some big deviations. They seem to be bigger for smaller countries ... But the model for the US also has large deviations that are associated with recessions.

      http://informationtransfereconomics.blogspot.com/2014/05/the-effect-of-expectations-in-economics_4.html

      But really I don't know. The ITM model tends to get trends

      http://informationtransfereconomics.blogspot.com/2014/01/what-is-and-isnt-explained-by.html

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  5. Jason, thanks for your response at Sumner's... eventually I'll get your story straight!

    Perhaps another few candidates to add to the above chart?

    Australia, Israel and Poland?

    http://thefaintofheart.wordpress.com/2014/05/17/too-many-coincidences-for-it-not-to-be-true/

    We'd expect all three to be to the left of the knee on your price level plot, no?

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    1. Australia is on there already -- it is the one that goes to the lowest left corner. In the original graph, it's in orange. It's to the left of the knee. The other two should come in to the left given anecdotal evidence in the econoblogosphere. I'll look into it.

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    2. Right... I should have remembered Australia on there. The reason I'm guessing where Poland and Israel might fall on that chart is based on Marcus' charts showing how they mostly stayed on or above their NGDP trend lines.

      Also, can I ask why you asked JP Koning the question you did, when his point number 7 in the sequence of Apple bonds to fiat money, seemed to indicate that Apple would conduct OMOs to regulate the price level denominated in their special bonds. He answered you, BTW, in case you didn't see that... mentioning "Wallace Neutrality" in the process.

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    3. Yeah I'm not sure I understood the answer. Wallace neutrality only applies in limited cases and appears not to be relevant.

      I asked the question because the argument gives a reason for money to behave basically like the quantity theory. A doubling of the "Apples" should exactly reduce the claims on the future cash flows by half because all Apples are the same. That is literally P Y = k M. Future cash flows should be unchanged by issuing Apples because the Apples are based on real performance of the company ... I.e. Y is the same so P must rise with M. The pure quantity theory isn't correct so I can't see what JP's new theory adds other than a complicated argument for the quantity theory.

      I drilled down a bit given his answer and ended up at the real bills doctrine through the links and some searches. Scott Sumner gave an example in Somalia where the currency is still in use even though there is no "Apple" or central government behind it. Custom as much as anything gives fiat currency it's value.

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  6. Also, OT: I read recently that Max Planck's initial explanation of the intensity of radiation as a function of frequency from a black body was, at the time, "ad hoc." I hope that would have been judged to be the "good" kind of ad hoc (if that story is true), since it eventually lead to something much more significant (quantum mechanics). First, do you agree that "ad hoc" is applicable to Planck's formula at the time? Second, do you have an example from physics or other science disciplines of "bad" ad hoc?

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    1. Here's what I'm imagining as an example of bad ad hoc: say N data points are measured in x vs y space for some physical process. Bad ad hoc might be using those N points to determine the N coefficients of an N-1 th order polynomial to fit all the points exactly. Would that qualify?

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    2. Whereas "good" ad hoc, in the same context might be realizing that all the points fit pretty well to some kind of function with just m parameters, where m << N. True?

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    3. The Planck story would be good ad hoc -- it's not trivial to go from quantized light to the blackbody intensity distribution. Assuming high energy light is less likely because the wavelengths smaller than the characteristic size given by hc/kT would be an example of bad ad hoc (you are assuming the result). Assuming the intensity distribution goes as c - x^2 around the peak would also be bad ad hoc (it's a maximum -- of course it does; you haven't added any information).

      Regarding your polynomial example, that works. However bad ad hoc can be more insidious. It involves assuming your result -- potentially hidden behind some twists and turns.

      There is a good example from international economics: the Hindu rate of growth.

      This might help:

      http://bahfest.com/

      This is a good one from outside economics:

      http://en.wikipedia.org/wiki/Antiperistasis

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    4. Thanks Jason, that helps. JKH recently has accused JP Koning of assuming the answer right here actually:

      http://jpkoning.blogspot.com/2014/05/from-corporate-bonds-to-fiat-cpi.html?showComment=1400174440497#c254235394104962847

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Also, try to avoid the use of dollar signs as they interfere with my setup of mathjax. I left it set up that way because I think this is funny for an economics blog. You can use € or £ instead.