18 March 2016

It's Alive!

Noah Smith seems to think that Japan is "an economics lab where theories go to die," notably asserting that "a tight labor market hasn't caused increasing prices. New Keynesian theory ... has failed to explain Japan's lack of inflation."

Au contraire! You see, Noah and other Phillips Curve doubters, Japan actually has an exceptionally good Phillips Curve, so unfortunately Noah Smith's eyeballing led him astray:
See that $R^2$ value? Do you see it? That's right, the Phillips Curve is alive and well in Japan, seemingly making it, at least in this case, an economics lab where theories that some people thought were discredited conspicuously come back strong.

If you don't like the scatter plot, look at the pretty awesome prediction for inflation that the linear fit gives:
Keep in mind that this prediction uses only one variable, the employment rate for people aged between 15 and 74, and it seems to work incredibly well, especially because expected inflation is nowhere to be seen (pun intended). It lives!


Same graph with core CPI instead:

No comments:

Post a Comment