it’s quite possible to say stupid things with equations

Economics is the most mathematical of the social sciences. That’s not because economists are smarter than, say, sociologists or political scientists; trust me,

it’s quite possible to say stupid things with equations 

In particular, the Fed would very much like to know how high it needs to keep the interest rate — or more precisely, the interest rate minus expected inflation — to avoid overheating the economy and reigniting inflation. This “natural rate of interest,” a term invented in 1898 by the Swedish economist Knut Wicksell, is often referred to as r* or r-star.

Back in 1968, Milton Friedman, in a deliberate echo of Wicksell, argued that there is also a “natural” rate of unemployment consistent with stable inflation. Since referring to any level of unemployment as natural raises some people’s hackles, this is often referred to as the NAIRU, for non-accelerating inflation rate of unemployment — and often denoted as, you guessed it, u*.

But even if the stars exist, can we locate them?

Now, one possible reason to think that r* may have risen is the surprising resilience of the economy in the face of Fed rate hikes. But will this resilience last? Is the economy slowing down, or is growth actually accelerating?

Based on the available data, you can believe whatever you want to believe.

Paul Krugman New York Times 25 August 2023

https://www.nytimes.com/2023/08/25/opinion/natural-interest-rate-r-star.html

Inlägg med etikett Star

https://englundmacro.blogspot.com/search/label/Star