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Message 3432
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| Subject: | [socialcredit] Inflation | | Date: | Friday, February 17, 2006 07:56:16 (+0100) | | From: | Per Almgren <info @........se>
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I have noticed the intense discussion about inflation. To my mind
inflation must be defined as the average time rate of the increase of
the price level in the society. It is of course difficult to measure
since the goods and services gradually changes over time.
For some months ago I looked upon the official Swedish statistics
about interest rate and price index from 1987 and up to late in 2005,
monthly average figures. I also checked the monthly unemployment
figures, after adjusted for seasonal variation. My aim was to see if
a fairly simple model could be used to describe the connections
between inflation, interest and unemployment. In my opinion it would
also be a great advantage if profit payments also could be included
in the model but I have not found any useful statistical data about that.
From some logical reasoning and calculations I have earlier found
that a useful model could be like this:
Inflation at the time T would equal one coefficient times the
interest rate a couple of months earlier than T, plus another
coefficient times the interest at another time earlier than T, plus a
constant. The coefficient of the smaller time difference ought to be
positive and somewhat larger than the absolute size of the
coefficient of the larger time difference. The second coefficient
ought to be a negative value. It would represent the influence of the
time rate change of the unemployment caused by the interest. The
first coefficient would represent the increasing of costs caused by
the interest, mainly due to the need to borrow more money to be able
to pay the interest.
For every month during the period, all combinations of time delays
between 0 and 35 months for the first coefficient and between the
first coefficient delay plus 1 and 36 months, totally 666
calculations for each month during the investigated period, were
performed. The best fit of time differences and coefficient sizes was
computed by the least-square method.
The result was that the best possible fit was obtained when the first
time difference was 4 months and the second time difference 8 months.
The first coefficient was approximately the double size of the
absolute value of the second negative coefficient.
The conclusion that can be drawn from this is that increasing the
interest rate will increase the inflation rate, quite the opposite of
what is told in most textbooks of political economy. The bad thing is
that the central bank boards believe what they find in the textbooks,
instead of looking into what really happens in the real life.
The rule of thumbs that could be deducted from this is that a
one-percent increase of the interest rate increases the yearly
inflation rate by one half percent in the Swedish economy.
The interest rate used in these calculations was the monthly average
of STIBOR, which is the daily interest rate for loans between the
larger banks in Sweden. I got the price index figures with two extra
decimals from the official bureau of statistics in Sweden (SCB), but
I also made a check with the usual published figures. It gave the
same results for the time differences but slightly other values for
the coefficients.
To see if the second time difference really was connected with the
time rate of the unemployment figures an identical calculation was
conducted with that type of data. Due to changed definitions, this
type of statistical data was only available from January 1990 to March 2005.
The unemployment rate varies seasonally with 2 to 3 % in the Swedish
economy so only data that was adjusted for this variation could be
used. The result was that the best fit with the same type of
two-coefficient model gave time differences of 7 and 9 months. The
coefficients were of approximately the same size and sign so an
increase of interest rate results after about 8 months of an
increasing of the time rate of unemployment. That conforms well to
the first described results.
It would be interesting to check the same time period in other
countries to see if similar results will be obtained. If somebody
could find the corresponding statistics of profit payments the model
could probably be extended to still better describe the real economy
since the costs for profit is significant, especially during the
later time period.
I can mail Excel-documents (265 KB and 249 KB) with the raw data and
calculations (including macros!) to you who might be interested.
Per Almgren
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Inflation
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