The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
- BLS Handbook of Methods
- Bureau of Economic Analysis
- Bureau of Labor Statistics
- Congressional Budget Office
- Economic Data - FRED® II, St. Louis Fed
- Office of Management and Budget
- Statistics: Releases and Historical Data, Board of Governors
- U.S. Census Bureau Economic Programs
- White House Economic Statistics Briefing Room
August 26, 2006
A Laffer Critic With Critcism I Criticize
At disco-tech.org (hat tip, The Capital Speculator), Arthur Laffer comes under fire from fellow traveler Bret Swanson for his defense-of-the-Fed opinion piece in Thursday's Wall Street Journal. I'm not one to dive into family disputes, but there is at least one contention to which I feel a response is needed. Swanson writes:
-- Dr. Laffer says expected inflation gleaned from TIPS bonds is the best predictor of inflation, but in fact TIPS have not been very good at all at predicting inflation.
I don't think there is any way to draw that conclusion. When monetary policymakers think about inflation expectations, the focus is almost always on long-term expectations -- the assumption being that the central bank has only modest control over inflation on a year-to-year basis. Since Treasury Inflation Protected Securities were introduced in 1997, it is just not possible to determine whether they have been good predictors at the relevant 5 to 10 year horizon.
Of course, the argument works both ways. Though I tend to agree with the sentiments expressed by Ryan DeJarnette (thanks again, TCS)...
Mr. Laffer explains inflation is under control when looking at the TIPS spread, or the difference in yields on TIPS and the 10-year bond. This spread tells you the market, which is the most efficient and effective entity when it comes to valuation and prediction, expects 10 year inflation rates around 2.5% a year...
... the claim that the TIPS market is giving us the "the most efficient and effective" estimate of inflation expectations, and hence inflation, is still largely an article of faith. Though there are several reasons that the simple TIPS spread might not be an unbiased predictor of inflation -- because of differentials in liquidity, for example -- trusting in this market measure of expectations is a leap I'm willing to take.
TrackBack URL for this entry:
Listed below are links to blogs that reference A Laffer Critic With Critcism I Criticize :
- GDPNow's Forecast: Why Did It Spike Recently?
- How Low Is the Unemployment Rate, Really?
- What Businesses Said about Tax Reform
- Financial Regulation: Fit for New Technologies?
- Is Macroprudential Supervision Ready for the Future?
- Labor Supply Constraints and Health Problems in Rural America
- Building a Better Model: Introducing Changes to GDPNow
- How Ill a Wind? Hurricanes' Impacts on Employment and Earnings
- When Health Insurance and Its Financial Cushion Disappear
- What Is the "Right" Policy Rate?
- February 2018
- January 2018
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- May 2017
- April 2017
- March 2017
- Business Cycles
- Business Inflation Expectations
- Capital and Investment
- Capital Markets
- Data Releases
- Economic conditions
- Economic Growth and Development
- Exchange Rates and the Dollar
- Fed Funds Futures
- Federal Debt and Deficits
- Federal Reserve and Monetary Policy
- Financial System
- Fiscal Policy
- Health Care
- Inflation Expectations
- Interest Rates
- Labor Markets
- Latin America/South America
- Monetary Policy
- Money Markets
- Real Estate
- Saving, Capital, and Investment
- Small Business
- Social Security
- This, That, and the Other
- Trade Deficit
- Wage Growth