Friday, August 10, 2012

Macroeconomic Surrealism

Wow. I am old and have already seen too much in my career, but this morning I was treated to a Dali-esque display of Macro.

Witness this blogpost, which graphs two completely unobservable and totally made up variables against each other and uses their correlation to castigate the Fed.

The first variable is "Aggregate demand uncertainty" and it is none other than the newly constructed index that has so riled up the progressive blogosphere.

The second is "Potential Nominal GDP" minus actual Nominal GDP.  I have been on record elsewhere criticizing measures of potential real GDP  but this is even stranger.

Wouldn't potential nominal GDP always be infinite? Can't the Fed always raise the price level a little bit more?

Isn't this a fake variable that doesn't even make sense in theory?

Anyway, it turns out that these two constructed versions of unobservable variables are negatively correlated. Check it out:

If two fake variables explain each other in a graph, does it make a sound?

People, the author of the post in question didn't make up these stinky variables; Potential Nominal GDP is on FRED for Pete's sake! He just used them to go all Luis Brunel on us.


Anonymous said...

That graph is extremely convincing! Look how negatively correlated they are!

Anonymous said...

His other graphs are even more convincing!

Anonymous said...

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