A note on casual empiricism
Macroeconomics has see a thrust towards technique, with formal methods being the norm and a strong focus on precision. When Captain James Cook pioneered meteorological observation that mapped wind and ocean currents, it allowed boats to precisely ascertain the optimal sailing time. However there was a reason why rules of thumb prevailed for so long. They are appropriate under the following conditions:
- Original situations
- Conditions of uncertainty
- Lack of data
Boats need GPS and macroeconomics needs DSGE models. But there's still a place for rules of thumb.
Money supply (MA)
We suspect that there is a useful middle ground between narrow and broad measures of the money supply, and attempt to define and identify an Austrian version called 'MA'. It can be viewed as a hybrid of M1 and MZM for the current UK economy. Our special report (released in June 2011) explains in more detail the composition, but note than in January 2012 we made some important updates (see here for an overview). Also, in January 2014 the Bank of England made a reclassification that accounts for the sudden decline (see here for details).
We will endeavour to backdate MA and provide more details on the changes but encourage comments and feedback in the meantime.
Bank of England:
By only focusing on final goods and services GDP has two major limitations: (i) it underestimates the amount of economic activity in the economy (by ignoring parts of the structure of production); (ii) it overestimates the role of consumption as a driver of recovery. Using Input-Output tables to find intermediate consumption, we can reveal the annual growth rate of "Gross Output" (defined as NGDP + intermediate consumption).
- "UK Gross Output grew by 3.49% in 2014", August 2016
- "Total Output Grew by 2.17% in 2012", November 2014
- "Gross Output Makes the Wall Street Journal", April 2014
- Skousen, Mark (2001) "Beyond GDP: A Breakthrough in National Income Accounting" The Freeman, 51(4).
Productivity norm inflation
This chart shows the relationship between CPI and CPI that is adjusted to take into a productivity norm (PN). It is based on George Selgin's work, and shows the inflation rate if underlying productivity changes were permitted to manifest themselves. The compilation method is explained in these posts:
- "New estimates of productivity norm inflation", September 2016
- "Estimating the Productivity Norm Price Level for the UK", March 2015
- Dowd, Kevin (1995) "Deflating the productivity norm" Journal of Macroeconomics, 17(3):717-732
- Selgin, George A., (1995) "The case for a 'productvity norm': Comment on Dowd" Journal of Macroeconomics, 17(4):733-740
On inflation expectations
- Cleveland Fed Estimates of Inflation Expectations
- Haubrich, J.G., “A New Approach to Gauging Inflation Expectations“, Federal Reserve Bank of Cleveland, 29th October 2009
In my policy paper I advocated a 2% NGDP target. The chart below shows actual NGDP relative to this benchmark, as well as a 4% growth rate.
Here is the NGDP growth rate:
The data used comes from "Gross Fixed Capital Formation" of the National Accounts (Table F). We define "private investment" as the sum of business investment and private sector investment. One way to calculate is to follow this link and use Table G1. It is important to copy the data into a new Excel spreadsheet and then paste the values and skipping the spaces. I then copy and paste into Google Drive.
For more details:
- "Kaleidic Economics publishes new indicator on private investment", December 20, 2011
- "Update to Private Investment series", March 19th 2015
Natural interest rate
Now moved to here: https://www.kaleidic.org/natural-rate/
- MA data is available on the 1st day of each month
- Gross Output is available on an annual basis (usually July)
- Shadow prices is compose of CPI data, which is released in the middle of each month, but also productivity data which is only released quarterly (latest release: 24th December 2014)
- NGDP data is available with the Second Estimate and Final Estimate of the National Accounts (i.e. on or around the 24th-26th of each May & June, August & September, November & December, and February & March)
- Private Investment is available with each release of the National Accounts (the First Estimate is released on or around the 24th-26th of each April, July, October, and January but is updated in the Second and Final Estimates)
Google Drive codes:
- MA KA01
- Gross output KA04
- Productivity norm inflation KA03
- NGDP KA11 (and NGDP target KA12)
- Private investment KA08
- Natural rate KA06
Default images are 575 x 400