Wednesday, May 10, 2017

"Price stability" is not the same as stable prices


A little history from Thomas Palley:

In the 1970’s the economics profession switched to focusing on inflation on grounds that monetary policy could not affect employment and output in any systematic way (Friedman, 1968; Lucas, 1972). Initially, that resulted in a new consensus that monetary policy should aim for price stability (zero inflation). However, a zero inflation target tended to land the economy in the misery zone, so the target was revised up and price stability was redefined as 2 percent inflation.

Price stability was redefined as 2 percent inflation.

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This graph from Robert Sahr

From SUMPRICE.PDF by Robert C. Sahr (2003)
shows that price stability was indeed possible over the long run, until, say, the 20th century.

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But maybe we have it all wrong. Check out this humorous graph from Reddit

Graph #2
The first three comments that show up at the Reddit site all complain that the graph should use a log scale because the "MASSIVE price swings" before 1950 "get obscured by this type of chart." I'd say it depends what you are trying to show. Also, on what the data measures.

But we should all be as happy as kings to see that the massive uptrend since 1950 indicates a massive increase in the "worth of one 1774 dollar".

1 comment:

The Arthurian said...

A vaguely related graph would show far fewer "months per year" of recession for the period after, oh, the Great Depression, than for the period before.