Saturday , November 16 2024
Home / Mike Norman Economics / One Weird Trick That Neoclassical Economists Hate! — Brian Romanchuk

One Weird Trick That Neoclassical Economists Hate! — Brian Romanchuk

Summary:
Blair Fix caused a bit of a stir last week on economics Twitter with a cleaned up version of the above chart taken from his article on interest rates and inflation. My chart is a scatter plot of the U.S. annual CPI inflation rate versus the effective funds rate, from 1954-2022. The blue line is the best linear fit of the two variables. The “linear model” suggests that inflation is an increasing function of the nominal interest rate.Blair was met with a predictable howl of indignation on Twitter. Why predictable? The belief that higher interest rates reduce inflation (with a technical twist I note below) is pretty much enshrined as an assumption in neoclassical economics. (I use “neoclassical” as a fancy-pants word to describe “mainstream academic economics,” as “mainstream” is somewhat

Topics:
Mike Norman considers the following as important:

This could be interesting, too:

Mike Norman writes Class

Mike Norman writes Episode 8 (S2) of the Smith Family Manga is now available — Bill Mitchell

Michael Hudson writes Beyond Surface Economics: The Case for Structural Reform

Nick Falvo writes Homelessness planning during COVID

Blair Fix caused a bit of a stir last week on economics Twitter with a cleaned up version of the above chart taken from his article on interest rates and inflation. My chart is a scatter plot of the U.S. annual CPI inflation rate versus the effective funds rate, from 1954-2022. The blue line is the best linear fit of the two variables. The “linear model” suggests that inflation is an increasing function of the nominal interest rate.

Blair was met with a predictable howl of indignation on Twitter. Why predictable? The belief that higher interest rates reduce inflation (with a technical twist I note below) is pretty much enshrined as an assumption in neoclassical economics. (I use “neoclassical” as a fancy-pants word to describe “mainstream academic economics,” as “mainstream” is somewhat ambiguous if we are not referring to academia.)

Although the firestorm of indignation the article created was fun and if I had any commercial sense I would pile into it (and I did in the past). However, I have gotten more boring as I have aged. The real answer is that “things are complicated.”

It's the methodology, stupid. As usual.

Bond Economics
One Weird Trick That Neoclassical Economists Hate!
Brian Romanchuk
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 *