There were two posts yesterday. The first was “Explaining Recovery Performance in Europe:”
I was very interested by the new paper by Claeys and Walsh on “plucking” as an explanation of differential performance in Europe; basically, they’re saying that fast growth has come in countries that previously had deep slumps. But how does that result interact with the result many of us have found, which is that differences in austerity seem to explain a lot? Here’s an example of what I find:
I tried to see where their result fits in; but I used a slightly different sample. I included Greece; I’m not sure why they excluded it (they say that they’re dropping countries that didn’t have any recovery, but why?) I also used the same dates for everyone, 2007-9 for the slump and 2009-14 for the recovery. And since I wanted to use structural deficits to measure austerity, I could only include Latvia among the Baltics.
What I got was this:
Latvia stands out, but in this sample it’s alone; the estimated coefficient on the size of the slump is large but hugely uncertain.
What happens if you throw both variables in? With standard errors in parentheses, I get Growth in GDP 2009-14 = 7.91 – .26(.28)*Change in GDP 2007-9 – 1.41(.27)*Change in structural balance as % of potential GDP. Plucking might be important, but it’s hard to tell given the lack of data. Austerity, on the other hand, comes in very clear.
Maybe the point is that there aren’t any deep mysteries that need explaining. You can point to individual countries and say that they did better than you might have expected, but any kind of non-cherry-picked analysis of the data really, really wants to tell you not just that austerity hurts growth but that it’s the major factor causing some European countries to do worse than others.
Yesterday’s second post was “Monetarism in Winter:”
Brad DeLong is writing about “cognitive closure” on the right, and focuses on the case of Allan Meltzer, the long-time monetarist standard-bearer and co-founder of the Shadow Open Market Committee. Meltzer has been predicting inflation, just around the corner, for six years; the experience apparently has had no impact on his conviction that he understands the economy better than the Fed. And he considers it rude and unprofessional when some of us point out how wrong he has been for how long.
But there’s one thing that struck me in particular about the last entry in Brad’s bill of particulars, where Meltzer says this:
The Fed’s third major error is its baffling inattention to the growth of monetary and credit aggregates. Central banks supply the raw material on which financial markets build the credit and money magnitudes. The reason given for neglecting these aggregates is usually a claim they are unstable. That is true only, if at all, of quarterly values. It is not true of medium- and longer-term values, as many researchers have shown.
I’m not sure what Meltzer is saying here, exactly. Surely the claim is not so much that the aggregates are unstable as that the relationship between those aggregates and variables of interest — like inflation — is unstable. Now, where might the Fed have gotten that idea? Maybe from this:
The velocity of M2 — the ratio of nominal GDP to a broadly defined version of the money supply — has turned out to be hugely variable. Once upon a time Milton Friedman called for slow, steady growth in M2 as the key to a stable economy; surely you can’t think that makes sense given developments since the mid-1980s.
But here we have Meltzer insisting that the Fed is making a terrible mistake by not worrying about monetary aggregates, and complaining bitterly about those who question whether, given his track record, he has any authority to lecture the Fed. It’s really very sad.