Thursday, May 22, 2008

De-Mythologizing Greenspan

Aside from "Easy Al"'s propensity to pump gazillions of USD's into markets (thus creating three distinct and disastrous "bubbles"), and re-arranging inflation calculations to reflect imaginary 'convenience' numbers (thus on paper lying about actual costs)--there's even MORE to the story, from BigPic:

It's worth noting that the shift in focus from total inflation to core inflation was a Greenspan era "innovation."

A quick excerpt [from a Wharton/Philly Fed study]:

"We find that core inflation, which omits food and energy prices, is less volatile than total inflation, but the reduced volatility comes from omitting the energy components. Several components of the CPI exhibit higher volatility than food prices. And an index that omits food and energy prices demonstrates slightly more volatility than a measure that omits only the energy components and retains the food components...

Perhaps most important, we find that including PCE inflation when forecasting CPI inflation and including CPI inflation when forecasting PCE inflation significantly improves the accuracy of the forecasting model for horizons up to one year. This suggests that each measure of inflation provides independent information that can be exploited to yield statistically significantly more accurate forecasts."

Al's retirement came far too late...

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