Is Ben Bernanke a finally coming out of the closet?

June 9, 2008 4:01 AM

While the wild crowd call it "Woodstock for Central Bankers", others get festivities off on a sour note, referring to it as "Understanding Inflation and the Implications for Monetary Policy". Regardless of what your invitation to this party reads, it starts today, Monday June 9th on the 50th anniversary of The Phillips Curve, a previously discredited forecasting tool which may be revived by Ben Bernanke at The Federal Reserve.

The Phillips Curve models an inverse relationship between unemployment and the rate of inflation. Specifically, as inflation increases unemployment decreases, and vice versa. Adherents of The Philips Curve argue for a monetary policy accepting relatively high rates of inflation as a trade off for low unemployment.

While we have seen The Phillips Curve hold during long periods of both American and British economic history we have also seen 1970's style stagflation invalidate this theory, and today many believe the purest form of this model to be flawed. However variants of The Phillips Curve exist and are still in use by a variety of market participants to help forecast interest rates.

It was long suspected Alan Greenspan used what is known as "The Fed Model" - a comparison of the ratio of stock's earnings to prices¹ against the yield on a 10 year Treasury bond - to help guide decisions regarding monetary policy. Knowing precisely what models are used by The Fed is highly valued information to those hoping to anticipate - and thus profit from - changes in interest rates.

Until now, Fed watchers could only speculate about the tools Ben Bernanke would deploy as part of his decision making process. But with his keynote address at this conference, and considering other times he's mentioned this model, it's now obvious - Ben Bernanke is a closet Phillips Curver.

No doubt a large number of market participants are busily building their own Phillips Curve models.

¹That is, a ratio calculated as earning divided by price, not to be confused with the more commonly known price to earnings ratio, or PE.

posted by Mutant (6 comments total)

Countdown to Malor vs. Mutant in 3... 2... 1...
posted by gregvr at 4:25 AM on June 9, 2008

The real central bankers' Woodstock is every August in Jacksonhole, Wyoming.
.. and since when did the Philip's curve and econ ratios become the "best of the web"?
they're not even the best of "monetary policy 101"! :D
posted by ruelle at 4:50 AM on June 9, 2008

(insert joke about brown acid here)
posted by grubi at 6:30 AM on June 9, 2008

Adherents of The Philips Curve argue for a monetary policy accepting relatively high rates of inflation as a trade off for low unemployment.

Since the Phillips Curve only describes a relationship between the two measures, couldn't the argument be equally made for acceptance of relatively high levels of unemployment as a trade-off for low inflation?
posted by aeschenkarnos at 6:59 AM on June 9, 2008

Only if you hate your workers, want to send your manufacturing overseas, are ridiculously greedy and want to create what I like to call a "Service/Information" economy where people's ideas and the services performed for the "Idea People" are what drive wealth around a nation.

But, that would NEVER happen in America.



*tongue planted firmly in cheek*
posted by Sam.Burdick at 7:18 AM on June 9, 2008

No doubt a large number of market participants are busily building their own Phillips Curve models.

Ben has already shown some aggressive discontinuity that will make any modeling difficult... the Jan 22 rate drop was taken outside the normal FOMC meetings. Once you start factoring in variables like that, the money spent on analysis could just as well be a quarter tossed into the air.
posted by three blind mice at 8:17 AM on June 9, 2008