June 30, 2005
Why Oh Why Can't We Have a Better Press Corps? (Yet Another WSJ Edition)
Mark Thoma's jaw drops:
Economist's View: WSJ Commentary: Monetary Policy Does Not Affect Core Inflation: The Wall Street Journal can do better than this. This article by Alan Reynolds of Cato claims that monetary policy has no effect on prices and inflation, a claim that is just plain dumb:
The Fed's Crude Policy, By Alan Reynolds, The Wall Street Journal: … It is commonly assumed that the Fed "leans against" inflation -- raising interest rates when inflation accelerates and lowering rates when inflation slows. Yet the graph nearby proves it is difficult to discover any coherent relationship between the funds rate and the "core" deflator for personal consumption expenditures (PCE), or any other measure of inflation not distorted by energy prices. … The only way to link the fed-funds rate to inflation is to assume the Fed suffered from "energy illusion" -- focusing on fluctuating energy prices rather than the impressive stability of other consumer prices. Perhaps the best way to show this is to look at the consumer price index with and without energy, so there can be no doubt that food prices (which are also excluded from core inflation) were irrelevant…
Here’s the problem with this.... Suppose that monetary policy perfectly controlled inflation.... [Then inflation] would be a flat line with no variation... and it would be uncorrelated with any other variable. The fact that there is no correlation between inflation and the ff rate would be an indication of the success of the policy, not that inflation and monetary policy are unrelated.... [T]he [right] conclusion is exactly the opposite of what [Reynolds] author claims. Finding a correlation between the ff rate and inflation including energy prices means, if policy is successful, that policy does not target energy prices, not that it does.... This does not belong in the Wall Street Journal.
I presume Mark has noticed that almost nothing on the editorial pages of the Wall Street Journal belongs anywhere.
This would make a good easy question for this summer's macroeconomics field exam, however.
Posted by DeLong at June 30, 2005 11:29 AM