Sunday, January 31, 2016

The BoJ's macroeconomic experiment

Via Frances Coppola, we have the BoJ forecasts for CPI inflation through 2017, including the effect of the new "negative interest rate". First, we shouldn't forget this in assessing central banks' capabilities in this regard. For the IT model forecast for Japan, see here.

However, it looks like the BoJ isn't predicting anything too far outside the IT model range. Recall the IT model does as well as is possible on these medium range forecasts assuming month to month fluctuations are mostly measurement error (I called it irreducible measurement error here). I show the model prediction along with 2σ (95%) errors for annual core CPI inflation.

Also, according to the quantity theory of labor, Japan would have to have higher labor force growth to get 2% inflation.

Here's the original graph from the BoJ's report from 30 Jan 2016:


  1. As you say, assuming the quantity theory of labor (QTL), Japan requires higher labor force growth to achieve a 2% inflation rate. Now where do we turn to try and determine a forecast for their labor force growth?

    I love this QTL concept. Imagine explaining the QTL and the QTM to visiting space aliens. You suppose the QTL might win them over as the better theory? Given the data? Cochrane sounds like he's given up on the QTM, but he'd perhaps replace it with a Quantity Theory of Regulations?

    I'm guessing the labor force growth in Japan is unlikely to increase much over the next few years, and thus Japan will likely undershoot their inflation target (assuming the QTL holds). But other than BoJ forecasters, who will take the other side of that bet? Probably not MMists. If Japan starts to undershoot MMists will just say they're not doing it right. The world must seem shockingly full of incompetent central bankers to MMists. After all the efficacy of negative IOR was evident in at most 5 minutes according to Sumner. That's like Napoleon finding a wagon train full of M16s with ammo, and still managing to lose the battle of Waterloo. From Sumner's response, he seems like he's already resigned to the BoJ's failure, because the market is he says. He gave me that impression after I asked if he now expects Japan to be easily hitting their targets a year from now. I find that difficult to square with his 5 minute comment.

    On the other hand, hyperinflationists will always predict hyperinflation. You have your own wager with Vincent, but for me he'd specified at least Jan and Feb would be at 2% a month this year. I'll check back with him in April. It was two years ago I pressed him for a date for Japan. There's no money on the line. But Vincent at least came up with a specific forecast. I just played the skeptic. I've forgotten the terms of your wager with him.

    Well this should be a very interesting experiment!

    1. In your estimation, which mainstream macroeconomist might be most open to seriously considering a QTL? Do you think some already have?

    2. Cesar Hidalgo has a quantity theory of industrial classification:

      The "QTL" is kind of an empirical reductio ad absurdum for me. If a theory doesn't do better than it, empirically, there exists a theoretically simpler and more empirically effective theory: namely the QTL. That wins if you are being scientific. The business cycle then is all about correlations in hiring and firing (a matching model). Everything else is secondary.

      But I don't think the QTL is really what is going on. Something coordinates the "sunspots" (business cycle). And it's not actually better than the "monetary" IT model, empirically (MIT model?). The CLF data is so noisy that significant smoothing has to be done to see anything. Check it out:

      I do annual or quarterly averages to make it less noisy. I don't have to do that for the MIT model -- that means it can have quarterly or monthly resolution as opposed to the QTL which is at best annual.

      I would say Roger Farmer would be the most amenable to it -- and he would say the stock market coordinates the sunspots. He already thinks unemployment is the key indicator.

      But really as it basically says what economists have been doing for years is useless, I predict most mainstream economists would consider it "naive".

    3. It should also be noted that the QTL is basically Okun's law with a bit of extra theory to make it describe nominal output and inflation.

    4. So Japan's unemployment rate is pretty low already (about 3%?), so according to Okun, they need to drop that another percentage point or so to get NGDP up a couple of percent? And inflation tends to rise at a slower rate. That seems like a tall order then. Do the MMists buy into Okun's law?

  2. BTW, Sumner doesn't have any use for Trump. He even said today that he'd vote Sanders, or a person selected at random, before he'd vote Trump. However it occurs to me that Trump might make the perfect MMist central bank chair. At least as good as Chuck Norris! He could simply will NGDP levels into being.

    1. Tell Nick Rowe. Maybe we could export Trump to Canada. ;)

      No, wait! Then they would build a wall to keep us out.

    2. I've asked Nick's fellow bloggers if Canadians are discussing their own wall in light of what's going on here. However, wall or no, it wouldn't surprise me if Trump threatened to deport Cruz to Canada. In fact, I should check the news, that may have already happened! :D

  3. O/T: Jason, Avon Barksdale left a comment at Nick Rowe's blog which expresses the same sentiment you did once in a blog post. However, I couldn't find your post. Do you know what I'm talking about?

    BTW, I use your search box quite frequently. If I can remember a key word or phrase in the title, text or even the comments, I find it quite helpful for getting me to where I want to go, so thanks for adding that! I couldn't make it work for me in this case though.

    1. Jason, thanks for those. "Talmudic" is a good word, keyword or not. But neither are the post I'm thinking of. As I recall the title went something like this:

      "Economics is about people. Science is about explanations."

      Something like that. You discussed how in Economics you tend to get a lot of focus on particular important economic thinkers from history and trying to explain more precisely what they thought (Keynes, Solow, Friedman, etc), much more so than in physical sciences. Pretty much what Avon said, except expanded into the theme of the whole post, not just a comment. ("Talmudic" does sum it up nicely though).

      Either that or I was hallucinating, which is a plausible explanation as well.

    2. Ah. That one doesn't express the same idea as Avon is expressing, though.

    3. That's where the hallucination factors in.

  4. Don't read this as a criticism -- this is not a bad thing, and I hope to have my name in one of those lists some day. It really means economics is in an exciting
    best education service time, a period of discovery and flux. Some of those names at the top of the post will be in textbooks for hundreds of years.


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