Thursday , March 28 2024
Home / Mike Norman Economics / Mish Shedlock — Yet Another Fed Study Concludes Phillip’s Curve is Nonsense

Mish Shedlock — Yet Another Fed Study Concludes Phillip’s Curve is Nonsense

Summary:
The Phillips Curve, an economic model developed by A. W. Phillips purports that inflation and unemployment have a stable and inverse relationship.  This has been a fundamental guiding economic theory used by the Fed for decades to set interest rates. Various studies have proven the theory is bogus, yet proponents keep believing.… Without the Phillips Curve, the current approach to monetary policy is groundless other than "discretionary." There is no rule.And it's not just the Phillips Curve that is nonsense. So is the concept of the natural rate of interest, which is theoretical (assumption-dependent) rather than observable. The assumptions don't hold water, and the results based on targeting a natural rate of interest and non-accelerating rate of unemployment (NAIRU) have little

Topics:
Mike Norman considers the following as important: ,

This could be interesting, too:

Angry Bear writes Open Thread January 4 2024 overly “restrictive” monetary policy

Hasan Cömert & T. Sabri Öncü writes Monetary Policy Debates in the Age of Deglobalisation: the Turkish Experiment – III

Hasan Cömert & T. Sabri Öncü writes Monetary Policy Debates in the Age of Deglobalisation: the Turkish Experiment – III

Hasan Cömert & T. Sabri Öncü writes Monetary Policy Debates in the Age of Deglobalisation: the Turkish Experiment – III

The Phillips Curve, an economic model developed by A. W. Phillips purports that inflation and unemployment have a stable and inverse relationship. 
This has been a fundamental guiding economic theory used by the Fed for decades to set interest rates. Various studies have proven the theory is bogus, yet proponents keep believing.…
Without the Phillips Curve, the current approach to monetary policy is groundless other than "discretionary." There is no rule.

And it's not just the Phillips Curve that is nonsense. So is the concept of the natural rate of interest, which is theoretical (assumption-dependent) rather than observable. The assumptions don't hold water, and the results based on targeting a natural rate of interest and non-accelerating rate of unemployment (NAIRU) have little empirical justification, either using a rule or discretion have not been impressive, to say the least.

Oh, and the Fed has no satisfactory theory of inflation. How to target something that isn't identified, especially when it is based on "expectations."


Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

Leave a Reply

Your email address will not be published. Required fields are marked *