Recently Steve Williamson made use of the H-P Filter to raise doubts about NGDP targeting. This generated a lively debate on ‘detrending’ so as to arrive at a stationary process amenable to statistical analysis. Tim Duy, David Glasner, Paul Krugman and I butted in.
After reading John Quiggin´s “Zombie Economics”, in particular chapter I “The Great Moderation”, in which he argues that it may be a myth, I decided to do some more illustrations. The results are charted below.
Leaving aside the ‘Bouncing 50s’, the successful policies of President Kennedy´s CEA, first chaired by Walter Heller and having people like James Tobin and Arthur Okun (Paul Samuelson was an outside advisor), took RGDP back to trend by 1965. The faith in ‘fine-tuning’ – the ironing-out of even minor fluctuations – ended up leading them to keep nominal spending (NGDP) growing on a rising trend. Rising inflation was the outcome, leading to “The Great Inflation” (“G.I.”). (Notice RGDP is systematically above trend)
After the “Volcker Transition” (“V.T.”), the economy entered the “Great Moderation”, a period marked by a large decrease in both nominal and real output volatility. (Notice that RGDP ‘hugs’ the trend during most of this time). Also, during this period NGDP follows a stable trend growth path.
Interesting to note that from the stock market´s point of view, the “Great Moderation” ‘ended’ in 1999, just as the Bush Jr. Administration came to power (PK will like that!).
Also of interest is the fact that – using the stock market ‘dating’ – the G.M. ended just as it was ‘discovered’ (meaning when the first papers about it were published). And lastly we have the ‘Bernanke Depression’ (‘D.P.’) where volatilities shoot up and the stock market plunges.
But you can try to build your own story from the illustrations!