“Nobel wager”

Gregory Mankiw provoked Krugman in March 2009. In “Wanna bet some of that Nobel money?” he writes:

Paul Krugman suggests that my skepticism about the administration’s growth forecast over the next few years is somehow “evil.” Well, Paul, if you are so confident in this forecast, would you like to place a wager on it and take advantage of my wickedness?

Team Obama says that real GDP in 2013 will be 15.6 percent above real GDP in 2008. (That number comes from compounding their predicted growth rates for these five years.) So, Paul, are you willing to wager that the economy will meet or exceed this benchmark? I am not much of a gambler, but that is a bet I would be happy to take the other side of (even as I hope to lose, for the sake of the economy).

Krugman “lost” the bet by a wide margin. In 2013 Q3 RGDP is only 8.7% above the level observed in 2008 Q4.

The basis for the “bet” revolved around the concept of “unit root”. Market Monetarists would have bet that if monetary policy remained tight (NGDP way below trend and growing less than trend) RGDP would fall short of the administration´s predictions. Five years on we know that monetary policy has been restrictive so the weak result for real output was not surprising.

For details, see here.

HT Catherine Johnson