Brad DeLong: Hats Off to Central Bankers

Brad DeLong says changes in central banking probably had a lot to do with the Great Moderation in inflation and output we have seen worldwide since the mid 1980s:

Hats off to the central bankers, by J Bradford DeLong, Project Syndicate: It has been 20 years since Alan Greenspan became chairman of the US Federal Reserve. The years since then have seen the fastest global average income growth rate of any generation, as well as remarkably few outbreaks of mass unemployment-causing deflation or wealth-destroying inflation. Only Japan’s lost decade-and-a-half and the hardships of the transition from communism count as true macroeconomic catastrophes of a magnitude that was depressingly common in earlier decades. This “great moderation” was not anticipated when Greenspan took office.

US fiscal policy was then thoroughly deranged — much more so than it is now. India appeared mired in stagnation. China was growing, but median living standards were not clearly in excess of those of China’s so-called “golden years” of the early 1950s, after land redistribution and before forced collectivisation turned the peasantry into serfs. European unemployment had just taken another large upward leap, and the “socialist” countries were so incompatible with rational economic development that their political systems would collapse within two years. Latin America was stuck in its own lost decade after the debt crisis at the start of the 1980s.

Of course, the years since 1987 have not been without big macroeconomic shocks. America’s stock market plummeted for technical reasons that year. Saddam Hussein’s invasion of Kuwait in 1991 shocked the world oil market. Europe’s fixed exchange rate mechanism collapsed in 1992. The rest of the decade was punctuated by the Mexican peso crisis of 1994, the east Asian crisis of 1997-98, and troubles in Brazil, Turkey, and elsewhere, and the new millennium began with the collapse of the dotcom bubble in 2000 and the economic fallout from the terrorist attacks of September 11 2001.

So far, none of these events — aside from Japan starting in the early 1990s and the failures of transition in the lands east of Poland — has caused a prolonged crisis. Economists have proposed three explanations for why macroeconomic catastrophes have not caused more human suffering over the past generation. First, some economists argue that we have just been lucky, because there has been no structural change that has made the world economy more resilient.

Second, central bankers have finally learned how to do their jobs. Before 1985, according to this theory, central bankers switched their objectives from year to year. One year, they might seek to control inflation, but the previous year they sought to reduce unemployment, and next year they might try to lower the government’s debt refinancing costs, and the year after that they might worry about keeping the exchange rate at whatever value their political masters preferred.

The lack of far-sighted decision-making on the part of central bankers meant that economic policy lurched from stop to go; to accelerate to slow down. When added to the normal shocks that afflict the world economy, this source of destabilising volatility created the unstable world before 1987 that led many to wonder why somebody like Greenspan would want the job.

The final explanation is that financial markets have calmed down. Today, the smart money in financial markets takes a long-term view that asset prices are for the most part rational expectations of discounted future fundamental values. Before 1985, by contrast, financial markets were overwhelmingly dominated by the herd behaviour of short-term traders, people who sought not to identify fundamentals, but to predict what average opinion would expect average opinion to be, and to predict it before average opinion did.

When I examine these issues, I see no evidence in favour of the first theory. Our luck has not been good since 1985. On the contrary, I think our luck — measured by the magnitude of the private sector and other shocks that have hit the global economy — has, in fact, been relatively bad. Nor do I see any evidence at all in favour of the third explanation. It would be nice if our financial markets were more rational than those of previous generations. But I don’t see any institutional changes that have made them so.

So my guess is that we would be well-advised to put our money on the theory that our central bankers today are more skilled, more far-sighted, and less prone to either short-sightedly jerking themselves around or being jerked around by political masters who unpredictably change the objectives they are supposed to pursue year after year. Long may this state of affairs continue.

There are actually more than three hypotheses. The ones I can recall are:

• Better technology, e.g. information processing allowing better inventory control and management
• Better policy, e.g. inflation targeting
• Good luck so that no big shocks hit the economy
• Financial innovation and deregulation
• Globalization leading to dispersed risk
• Better business practices (this is less common, here's the link)
• Increased rationality of participants in financial markets
• Demographic shifts (again, since this less commonly offered as an explanation, here's the link)

The cross-country evidence on moderating output fluctuations does not correspond as well as you would hope to the adoption of inflation targeting if better policy is the primary factor behind the Great Moderation. So, while I think central banking is part of the explanation, particularly for moderating inflation, I don't think it's the whole story (the explanations are not mutually exclusive, and the reasons for declining output variability may differ from the reasons for declining inflation).

Though it's difficult to sort out because many of these factors occurred at roughly the same time (e.g. computers and inflation targeting both appeared at about the time output and inflation began moderating in the 1980s), and different papers offer different answers, I believe that technology, digital information technology in particular, has also made a big difference in smoothing fluctuations in recent decades. [Partial list of references  at bottom of this post; also see better technology, better inflation policy, good luck, financial innovation, and increased commercial openness; graph of output volatility]

Comments

[alphie]

I think the credit should all go to China, whose booming economy these past two decades have acted as a flywheel on the American economy.

[Alan]

Is there a reason to begin with Greenspan in 1987, rather than with the emergence from the 1982 recession under Volcker?

[Mark Thoma]

For the U.S., many mark the date of the onset of the Great Moderation very specifically - March 1984 - though not all agree it's this sharp of a break, and the break point varies across countries.

Here's a graph

http://economistsview.typepad.com/economistsview/2006/01/what_explains_t.html

The paper discussed in the post cites increased commercial openness as the source of the change.

[Update: See, for example, Ramey and Vine:Interestingly, statistical tests point to a structural break in the first quarter of 1984 rather than to a gradual decline. The phenomenon also appears to extend beyond U.S. borders. Blanchard and Simon (2001) and Stock and Watson (2003a) show that all G-7 countries save Japan have experienced a decline in volatility in recent periods, though the timing and nature of the declines vary by country.]

[anne]

"First, some economists argue that we have just been lucky, because there has been no structural change that has made the world economy more resilient."

Alan Greenspan however argued repeatedly that from 1980 on the American economy first and world economy second were becoming more resilient. I completely agree.

[anne]

No; the stock and bond markets would record the "great moderation" from somewhere in the summer of 1982. I do not have my notes handy, but I think I traced the change to end July - beginning August 1982.

[anne]

By March 1984, we were almost 2 years in on wild bull markets in stocks and bonds in America, Europe and Japan. This suggests to me that Alan Greenspan is right, and the moderation was shadowed by American structural changes from the beginning of the decade. Then, Paul Volker changed inflation expectations and the change became evident to investors. Warren Buffett also wrote somewhere that the American economy changed structurally from about 1980.

[anne]

About the beginning of the 1980s, there were important financial innovations. Just about this time investors came to understand the principle of duration in bonds, which radically changed the nature of risk control for institutional investors in bonds.

Vanguard took immediate advantage of duration control and bond investing was revolutionized in a transparent way. Also, as Warren Buffett wrote Freddie Mac and GNMA mortgage bond packages come to market in another revolution.

What more can we think of?

[Meh]

If you look at the graph that Mark links to above, it's clear that most of the serious volatility occured in a different era, that of extreme fluctuations in the "hotness" of the Cold War. Vietnam, Afghanistan, etc. Throw in the Oil Crisis for good measure.

That makes me think DeLong is too eager to junk the "good luck" hypothesis, or at least, too eager to ignore that there are factors beyond "economics" at work. War being the most obvious one.

[Ivan Kitov]

Since 2004, I have been developing a different approach to the explanation of the Great Moderation. It is much simpler and quantitative. Surprisingly, central banks do not play any visible role in real economic growth and inflation. The driving force behind inflation and unemployment is the change in the level of labor force. This explains the last thirty to fifty years in such countries as the US, France, Austria, and Japan. (Other developed countries are waiting to be analyzed.)
I cannot repeat here even principal findings, but some simple illustrations (figures comparing predicted and observed inflation and unemployment in the USA since 1960) are available in my blog “Inflation in the USA” - http://inflationusa.blogspot.com/ .

[anne]

I am not arguing with Mark Thoma, only with the dating of the change. In the beginning of the 1980s, Fidelity revolutionized stock investing by dramatically lowering costs and publicizing Peter Lynch of Magellan. Vanguard already was indexing at far lower cost, but the advantage was perceived slowly as John Bogle has written. Indexing catches on only by 1982-1983, though beginning in 1976.

Still, Vanguard had put insurance company bond portfolios to shame by 1982-1983 and with Fidelity the mutual fund era was come and insurance company era in decline.

Heck, the below investment grade bond market was in place in 1981.

[anne]

Another memory is John Bogle telling us in lecture of losses in municipal bonds funds run by Citibank before 1980 that ran 20% a year. Vanguard showed what duration was and how to control duration in a portfolio, at minimal cost, and bond investing was revolutionized for professionals and retail investors. There would be no more 20% losses in any decent bond portfolio. But, that meant access to capital for investment grade companies was changed dramatically.

[ECONOMISTA NON GRATA]

Let's just face it.... It's nothing unusual if viewed in historical context. Science, technology, efficient markets, productivity and population growth... What's the big deal....? It's always been like that, only the rate has changed. The downside of course has been that a large percentage of the population of this planet has been priced out and shall exist as something less than slaves. I guess that it's okay for the English speaking whites, you know "devine destiny" and all that tripe...

[donna]

August 1982, Anne?

Hmmmm....

http://usinfo.state.gov/eap/Archive_Index/joint_communique_1982.html

[anne]

Well, I am thinking with no notes; but I remember long term interest rates peaking in December 1981, then a short lived decline and rise till summer 1982 when an extended decline in interest rates began that lasted until 2002. Stocks followed bonds in rising in value from summer 1982, but long term bonds were a terrific investment for 20 years. Also, Alan Greenspan was right when he commented that home owners who chose variable rate mortgages from the beginning of availability early in the 1980s were right. Interest rates would rise in cycles after 1982, but the extended pattern was always lower.

[anne]

Donna raises the issue of China's influence on the international economy, but I would set the influence loosely after 1990. Brad DeLong recognized the influence of China early on for an American, but that only after 1996. I do not have a proper sense of China's influence even now, but suspect a substantial impact from at least 1990 and growing rapidly ever since seemingly managing every inevitable blockage. China strikes me on a development and influence path similar to America's from 1875 to 1925.

[skeptonomist]

A factor which should not be ignored in explaining the moderation of boom and bust cycles since WW2 is the greater participation of governments in the economy. Even without active Keynesian fiscal policy, government spending and investment decisions are made on completely different grounds from private decisions. The public has come to expect and trust the government to intervene to prevent depression, and this in turn affects private investment and consumption decisions. A rational private person anticipating recession must decrease investment and/or spending, but the government decisions, if not the opposite on Keynesian grounds, take little account of such anticipation. I think it is obvious that this is a structural change that has made economies more resilient. The expansion of government has been a continuous process in the US.

I find the arguments in favor of the power of monetary policy to be very ad hoc and often contradicted by actual events. The interest rate set by the Fed is very important, but it could not possibly do all the different things claimed by proponents.

[Tom Geraghty]

Gee, this all sounds so familiar . . . I wonder where I've heard it before?

2000s

It has been 20 years since Alan Greenspan became chairman of the US Federal Reserve. The years since then have seen the fastest global average income growth rate of any generation, as well as remarkably few outbreaks of mass unemployment-causing deflation or wealth-destroying inflation.

1960s:

the decade of the 1960s was a period of remarkable prosperity in the U.S. as measured by such statistics as GNP and the unemployment rate. While the 1950s included several periods of stagnation and recession, the following decade was a period of nearly unblemished prosperity. The economy grew at a brisk pace and employment and wages grew at good rates. America was able to fight the Cold War, the Vietnam War, the war against poverty, and win the space race, simultaneously.

2000s:

. . . central bankers have finally learned how to do their jobs. . . . our central bankers today are more skilled, more far-sighted, and less prone to either short-sightedly jerking themselves around or being jerked around by political masters who unpredictably change the objectives they are supposed to pursue year after year.

also:

I believe that technology, digital information technology in particular, has also made a big difference in smoothing fluctuations in recent decades.

1960s:

Credit for the expansion was given to two primary factors.

The first factor was scientific management of the economy by the "new economists" who were brought to Washington to help fine-tune the economy with fiscal and monetary policy. . . . the New Deal had employed fiscal stimulus of the economy a la Keynesian economics. . . . those experiments [were considered] successful and . . . provided evidence of the success of countercyclical fiscal policy. In [their] view, the much older "fiscal religion" of limiting the size of government and keeping its budget in balance was based mostly on myth and superstition. Overthrowing the superstitions of the past and embracing scientific management of the economy had allowed economists to fully grasp and subdue the business cycle.

The second factor was the new technology that was introduced into the economy, particularly computer technology, consumer electronics, and technological advances related to space exploration.

Hmmm . . . circumstances may change, but the hubris never goes away.

[anne]

Following Mark Thoma and Brad DeLong, whenever we date the great moderation, I have often asked and received no reasonable answer as to how many pension funds have performed so poorly these last 25 years through an astonishing extended bull market in stocks, bonds and commercial real estate. What am I always missing?

[Bill Conerly]

For those of you who would prefer to listen rather than read, my interview with Mark on The Great Moderation is free at http://www.businomics.com/index.php/bills-interviews

[Farrar Richardson]

"Increased rationality of participants in financial markets"

Marc, you must be kidding. The fed has yet to learn how to manage financial bubbles. In fact, IMHO as a one time banker, the fed has been doing only half its duty (although perhaps doing that half well) Due to some idealogical blindness, they have practically given up trying to manage credit markets, as the current CDO/CLO fiasco indicates.

[Farrar Richardson]

Going to bed now - nine hours ahead of Oregon, but I'll be looking tomorrow to see any comments on the Fed's role in credit markets

[anne]

There was the saving and loan collapse in the early 1980s, then there was the stock market explosive growth and panic from September 1985 to December 1987, then the collapse of part of the high yield bond market and the commerical bank failures from 1989, the crash in Japan beginning January 1990, successful currency attacks in Europe in 1992, derivstive collapse in the wake of rising interest rates in 1994, Mexican devaluation in 1994, Asian crisis beginning in 1997, ...

All sorts of market roiling events I can think of on a moment, and others I have set aside.

[knzn]

Let me suggest a couple of other hypotheses: growth of the relatively stable service-producing industries at the expense (when measured as a fraction of employment) of the relatively unstable goods-producing industries; and an increasingly efficient labor market, which made monetary policy easier by reducing the NAIRU.

[reason]

Let me try another one, the collapse of comecon and the integration of the socialist world in the world market. This corresponded to a demographic slow down AND exploitation of new raw material sources. It provided a constant deflationary force, allowing consistently (even increasingly) expansionary policy to be followed.

Another way to say this is that the world is still on a long expansion following a deflationary shock.

[Anarcho]

Christ, talk about narrow vision.

What has central bank policy been based on since 1980? The NAIRU -- raising interest rates when the labour market gets tight (i.e., when workers are able to get a pay rise) to increase unemployment. The Monetarism imposed by Thatcher and Reagan failed, but it did generate a deep slump and massive unemployment. The unemployment rate was kept high due to the NAIRU ideology, so weakening labour and unions.

This has meant that wages and productivity no long rise together as they did in the 1950s, 60s and 70s. With productivity gains being accumulated by capital and labour's income stagnating, then firms no longer have to pass on cost increases in the form of higher prices. And so inflation is lower.

In other words, the great moderation is the result of a successful class war by capital against labour. This was done by the central banks under the NAIRU fallacy.

This basic argument is hardly new. Joan Robinson predicted that full employment would result in high inflation in 1943, while Michal Kalecki argued that capitalists would get sick of full unemployment as it eroded their power around the same time. Or looking even further back, anarchist/socialist critics of capitalism had been stressing the role of unemployment in disciplining labour since the 1840s.

So maybe, just maybe, if you look at what the central banks do (and, for example, what Greenspan actually said!) you will see that the real causes for low inflation can be found. Or, perhaps, it is just a coincidence that exploding inequality, rising productivity and stagnant real wages and low inflation just happen to have occurred at the same time?

[I.O.Kitov]

Mark Thoma,
Don't you feel that almost all of the potential explanations or assumptions you have formulated have a reverse side? The same arguments can be successfully used to explain a higher level and volatility of inflation and "output". For example,

-Better technology, e.g. information processing allowing better inventory control and management .
The technology accelerates at a varying speed during the last 25 years. If such changes in technology as step increase in computer capabilities, mobile phones, etc. would directly influence these macroeconomic variables, one could expect a very high volatility compared to that observed during the "electro-mechanical" era with its long cycles of production. In this new era, changes need much shorter time to be implemented.

-Better policy, e.g. inflation targeting
Better policy always induces problems associated with its implementation. Following strict and predictable rules allows creation of counteractive actions which use weak (since no set of rules is perfect) points. For example, if a policeman must visit some specific area every hour a potential thief has 59 safe minutes. In general, any predictable reaction creates weakness and incentive to violate common rules without being caught. (Soros has done something like that, if I got it right).

-Good luck so that no big shocks hit the economy
I agree with this point since it indicates at some driving force behind inflation, which has been characterized by a lower volatility and level during the last 25 years. I propose the change in labor force level, which explains 90% of inflation variability between 1960 and 2005.

-Financial innovation and deregulation
Do not understand this point well but any innovation is a potential source of a higher volatility, at least at 50-50 level. Deregulation might potentially be a source of lower volatility because of "destructive interference", but opens some channels for counteraction as well

-Globalization leading to dispersed risk
There is a problem with the balance of risk across the US border. If positive, then acts in opposite direction to Great Moderation. For example, sequence of financial crashes in Asian countries, default in Russia, …

-Better business practices (this is less common, here's the link)
Does that mean that entrepreneurs do not seek for the highest profit any more?

-Increased rationality of participants in financial markets
Same as with better policy. If most economic agents are rational, a small part will always have a big incentive to use that for own profit.

-Demographic shifts
Partially it confirms labor force as the driving force.

[reason]

The 1984 date is similar (not quite coincident) to the date of Perestroika.

[I.O.Kitov]

As a matter of fact, the flux of various events is so dense in this small world that one can always find something contemporary. In many cases, the causality principle is reduced to its simples form - simultaneous means linked.
By the way, so called Perestroika started in the second quarter of 1985.
http://en.wikipedia.org/wiki/Perestroika

[reason]

And Windows came out in 1985. Personally, I think a number of different forces came together and the exact timing is not possible to pinpoint. But what was definitely happening by the mid 1980s was the break down in the labour hoarding model of labour relations that started with the second world war.

But I also wonder if the great moderation is so pronounced if you look at employment history rather than GDP. It could simply be that measurement issues with GDP are clouding what one is seeing. If the swings in employment are just as large, then this show that to be the case.

[I.O.Kitov]

reason,

Inflation in the USA, as measured by CPI or GDP deflator, exactly repeats the path of the labor force change (the change of the number of employed+unemployed) with a two-year delay.
If you could give me a favor and look at some figures in my blog
http://inflationusa.blogspot.com/
I would appreciate your comments.

[reason]

I.O.Kitov...
interesting .... but it is a bit like technical analysis of stockmarkets and astrology, strong on prediction but short on explaination. I would guess it could relate to lifetime income expenditure models and demographic structure of the population. (I'm strong on pushing economists to use more disaggregated analysis rather than thinking that aggregates can blindly being used without reference to their composition.)

Basically my of the top of my head hypothesis here is that inflation comes from an increase in demand just before a large cohort joins the labour market (as parents pay for education costs). As this cohort joins the labour market, demand falls just as the supply of labour rises moderating inflation and pushing up unemployment.

I would really like you to show me this analysis for Japan. Japan really has experienced deflation recently and so it would be a good test for your US predictions. There could be policy from all this of course - the differences in lags and elasticities between countries may be suggestive.

[reason]

I.O. Kitov...
another picky point - you reference your other website but don't link to it!

[reason]

I.O. Kitov

I read some of your other short essays. Have you thought of doing some analysis on nominal GDP rather than real GDP and inflation. You never look into nominal GDP but I know some macro theorists think it is important.

[Ivan Kitov]

reason,

Your comment on technical character of my research is an interesting point. In hard sciences there is nothing except “technical analysis” in terms of finding relations among measured values. Only having some a priory axioms, as in mathematics, one can explain everything using pre-defined terminology. In physics, question “why” is practically prohibited – we have what we have. For example, why does gravity force inversely proportional to the square of distance or why electron has negative charge? Even if these questions can be answered the answers will create only more questions like those. So, saying about technical research you really meant something not bad for me – it is just an attempt to find a long-term equilibrium relation between measured variables.

About disaggregating macroeconomic variables. Physics has demonstrated that this way is not fruitful as the first step. Statistical physics demonstrates that you can not give any reasonable description to an open system with unknown exchange across its border. So, disaggregated variables fluctuate so much and in so unpredictable way that one should abandon any attempt to describe such variables quantitatively. For closed systems, some aggregated values can be linked by quantitative relationships, as observed in hard sciences.

Your assumption on the influence of new cohorts is partially right. The change in the number of population of some specific age actually defines real economic growth but not inflation. Inflation is entirely defined by the change rate of labor force level, as you can see from the figures and statistical analysis in my other papers where cointegration tests are conducted. You can find these papers at http://ideas.repec.org/e/pki113.html .

Japan is an excellent example demonstrating that inflation is a liner function of the change rate of labor force. The following paper contains corresponding analysis
http://ideas.repec.org/p/pra/mprapa/2737.html
One of the important findings is that there is no way for Japan to reverse this bad deflation (as represented by GDP deflator) trend in near future.

Also similar analysis has been carried out for France and Austria. Also works well in statistical terms. My paper http://ideas.repec.org/p/pra/mprapa/2736.html details this statement.

Nominal GDP is actually measured variable. Real GDP in the residual of nominal GDP and GDP price deflator. I do not model nominal GDP but definitely have a model of nominal Gross Domestic Income or personal income distribution (PID). Actually this is the basement for the study of inflation and real economic growth as also shown in my papers related to PID and inequality.
I understand that you would, like to have some series of words which explains accurately why nature like it is. I do not know, I just want to find links between measured variables – same thing what I do as a professional scientist in my narrow field of seismology. You can buy or do not buy into my arguments – the dry residual is the relationships which work over years.

[anne]

http://delong.typepad.com/sdj/2007/07/central-banking.html

July 4, 2007

This one looks like playing tennis with the net down. Who is "we" here and what is the basis of comparsion? Certainly Latin America did horribly over this period as did the countries of the former Soviet Union (although Russia is now rebounding strongly). The huge growth in China and india is impressive, but this is the work of Alan Greenspan?

In terms of the U.S./Europe we had a very bad stretch from the 1973 to the dating of the great moderation, but if we take twenty year periods, growth in the U.S. Europe was certainly greater in the period from 1963 to whatever end date is chosen than in the last twenty years.

Finally, we are sitting on huge imbalances in the form of an unsustainable trade deficit and a housing bubble. My bet is that the adjustment will not be pretty. I know that our central bankers like to say that preventing asset bubbles is not part of their job description, but we usually don't let the workers define the job. The economic damage caused by asset bubbles and their collapse swamps the damage from modest increases in the rate of inflation. If our central bankers don't feel competent to deal with asset bubbles, then they should be replaced by people who do.

-- Dean Baker

[anne]

Dean Baker is questioning, "So my guess is that we would be well-advised to put our money on the theory that our central bankers today are more skilled...." I would agree in that I find no reason to believe central bankers as a class are more skilled today, as opposed to responding to differences in structural conditions that have made commonplace responses work reasonable well.

[ECONOMISTA NON GRATA]

"China will never be able to reach a level of consumption per inhabitant comparable to that of the Americans, with two cars per family, three televisions, four computers and cell phones, a house three times too big for its inhabitants, which generates energy consumption that would be sufficient to the needs of ten, even twenty people on other continents."

"The economic system works by monopolizing wealth and power at the expense of those who have the least, and of the middle classes that dream - ever more vainly - of hoisting themselves into the cocoon of the present financial oligarchy."

Economic growth and efficiency has been rough, thank the centrall bankers... I guess...

They say, if it's happening to you it's genocide, if you're watching it happen to someone else it's ethnic cleansing and if you're doing it to someone else it's devine destiny.

Happy 4th of July,

Econolicious

[reason]

Ivan Kitov...
The reason I query your answer is because the demographic and inflation history of the entire world in the post war period (which is all you model) is dominated by two events, the post war baby boom and the great inflation of the 1970s (which according to who you believed caused or was the result of the end of the Bretton Woods international currency system).

Without a believable mechanism, it is hard to know how believable your results are, simply because of the dominance of these particular events. Have you tried your model for longer and shorter periods?

Secondly, I don't find your description of physics as purely empirical. Without theory you can make no predictions. I also think you misunderstand what I mean by disaggegation. I good example is cohort analysis. Only in a static population can you assume that changes in the proportions within a population have no effect on aggregate relationships. It is like measuring in physics the luminosity of the sky without considering what sort of bodies are in that part of the sky.

[I.O.Kitov]

Reason,

The post war period is a common interval to theorize in macroeconomics, especially related to GDP growth and inflation. The reason is absolutely simple - there are no accurate and reliable data before 1955 or even 1960. The concept of GDP was introduced only in the 1950s. (I should say here that European countries usually provide more or less reliable data starting from 1967 or even 1983, as the Eurostat web-site evidences.) Therefore, you can hardly find any accurate quantitative analysis for the period before 1960.

You use at everyday basis the law of universal gravitation. The essence of this law is that all measurements made in specific (non-relativistic) conditions obey the same relationship, as expressed by mathematical equation. There is no "believable" mechanism behind this law, i.e. you can not explain in words or mathematical equations why the law looks like it is. So to say, the gravity can not be deduced from some other physical phenomena.
I agree that corresponding equation(s), which you can also call theory, plays an important role in the analysis of relevant data and is used to extrapolate observations. However, only measurements can distinguish between competing theories. No theory can be valid a priory, except mathematical one as based on axioms.

There is two principal ways to validate some empirical relationship - logical and historical. The latter refers to a longer observation of the same system. I can not extend the relationship between labor force and inflation back in the past with the current set of unreliable data. At the same time, the future evolution of inflation can be easily (and accurately) predicted at a two-year horizon using currently available measurements of labor force as provided by the US Census Bureau and the BLS. Using labor force projections (CBO, BLS, independent researchers) I also made forecasts at longer horizons - from two to fifteen years. So, here I can only wait.
The logical way includes analysis of other countries with similar systems. As I indicated before these were Japan, France, Austria.
Now I understand better your definition of disaggregation. Might be it is more relevant to boundary conditions, as used in my analysis of real GDP, than to parts of a closed system.

[morrisonbonpasse]

Whatever the role of the world's central banks in the Great Moderation, we still have the problem that there are too many central banks managing too many currencies. The existing multicurrency system requires expensive transaction costs between currencies of approximately $400 billion per year, and the unpredictable fluctuations are expensive and risky. We are in constant danger of a currency crisis of one or more major currencies.
Instead the world should move to a Single Global Currency to be managed by a Global Central Bank within a Global Monetary Union, just like the European Central Bank within the European Monetary Union, or the Eastern Caribbean Central bank, etc.
The benefits of a Single Global Currency will be substantial:
- Annual foreign exchange transaction costs of $400 billion will be eliminated.
- Worldwide asset values will increase by about $36 trillion.
- Worldwide GDP will increase by about $9 trillion.
- Global currency imbalances will be eliminated.
- All Balance of Payments problems will be eliminated.
- Currency crises will be prevented.
- Currency speculation will be eliminated.
- Currency fluctuations, and the need for hedging, will be eliminated.
- The need for foreign exchange reserves, now over $4 trillion, will be eliminated and these funds can be used for more productive purposes than maintaining an inefficient foreign exchange system.
If a monetary union in Europe works (still an issue for a number of economists) for 13 countries, soon to be 15 and then 22, then why not plan now for a monetary union for 192 countries?
For more information, please visit the website of the Single Global Currency Assn. at www.singleglobalcurrency.org. Our goal is implementation by 2024 and we published the book, "The Single Global Currency - Common Cents for the World" and invite comments, suggestions and criticisms. The 2007 Edition is available from Amazon.com and the Single Global Currency Association, and the original 2006 version is online at the association's website at http://www.singleglobalcurrency.org/book_about.html and at the RePEc Munchen personal archive at http://mpra.ub.uni-muenchen.de/1175/.

[reason]

Morrisonbonpasse...
Haven't you ever wondered WHY there are so many currencies today? The world once did have a single currency (GOLD) but for various reasons there were problems with the adjustment paths it forced on individual nations. European currency union is only possible when certain restrictions are accepted by the countries joining it, and they the retain the right to leave.

[Lorne]

Smoothed fluctuations? Alan Greenspan? 1987 a brief technical occurance? What are you drinking?

Methinks there might be a bubble, as in tens of thousands of poor Chinese sods buying equities since "the government can't afford to let the market crash before the Olympics".

A bubble is a bubble is a bubble.

I'm afraid the US Empire will fare much more poorly than the British Empire at a similar notch in history.