John Cochrane Dream vs. Reality In the Far East

A Benjamin Cole post

Just off the press:

“The average wage of Korean workers has surpassed that of Japan in terms of purchasing power parity (PPP) for the first time….According to the 2014 wage report released by the [OECD], wages of the average full-time Korean worker stood at $36,354 as of the end of 2013, higher than $36,354 in Japan, in terms of PPP.”

Okay, and now this:

For the last 20 years Japan has come close to living in John Cochrane Dream, where minor deflation is the norm, and interest rates are dead flat.

The University of Chicago economist Cochrane has called for a Federal Reserve Board that targets deflation. Interest rates would stabilize around zero, posits Cochrane, and banks would have unlimited reserves to lend out.

Back in the world as it has transpired, The Republic of Korea (“South Korea” to normal people) kept inflation in the moderate range of under 10% from 1990 to 2000, and then under 5%, since 2000. But not at near zero, as in Japan.


For the past 20 years, South Korea has beaten Japan to a pulp, economically speaking.

In terms of real GDP per capita in the last 20 years, Koreans have more than doubled to $32,500, while the Japanese have only been able to edge to $35,000 from $30,500, figures from World Bank.

But Inflation!

Why are some economists so fixated on tight money and zero inflation, if not outright deflation?

It can’t be on the basis on real world economies.

For that matter, from 1982 to 2007, the U.S. economy expanded by a little more than 3%, real, annually compounded, and inflation was just a little less than 3% annually compounded. There is no modern economy that prospered at ZLB.

The United States, the South Korea and Japan examples, offer long track records and in recent history, of economies with the structural impediments and institutional imperfections that are inevitable in modern economies and democracies.

Economists answer: “Sure, mild inflation is associated with robust real economic growth in the real world. But more importantly, does mild inflation work in theory or in my model?”

John Cochrane says “No.”

PS: Like every economist, my idea of a sexy website is the St. Louis Fed’s FRED series.

But the St; Louis FRED series reports inflation in S. Korea was 1.30787 Percent in 2013. The old joke is economists use decimal points to show they have a sense of humor. What to make of this figure going out five places past the decimal point?


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