Paul Krugman compares inflation in US and Japan

Paul Krugman, after this piece admitting the general failure of economics, explains in here why inflation in Japan is very low (due to deflation expectations) and why the US will repeat all the way down. Except the future of the US inflation, i.e. deflation starting in  2012, there is no right explanation os the driving force behind price inflation. We explained the case of Japan five years ago, and predicted an extended period of deflation in the US six years ago. 

Oil falls - attractive to buy

Today, oil price has been declining since early morning. It looks more and more attractive to buy. For $78 per barrel one cac obtain between 3% and  5% return in a week or so with the price at $82 to $84. Two weeks ago we proposed the same thing and the return was around 10% with back and forth oscillations between $84 and $79.

Time to buy oil futures. Again

Ten days ago the price of oil was very low relative to its expected level in September. We concluded that it was a good time to buy oil futures because the price had to bounce back to $84. It did happen several days later and we proposed to sell at $84. Now it is a good time again to buy oil futures since the current price is below the expected equilibrium level for October, which is between $80 and  $82. The expected return at a two-week horizon is about 3%.

Summer issue of Theoretical and Practical Research in Economic Fields

As an Editor, I am happy to announce that the summer issue of the Theoretical and Practical Research in Economic Fields has been published. There is my paper as well, pp. 86-93:

THE EVOLUTION OF FIRM SIZE DISTRIBUTION

Ivan O. KITOV

Institute for the Geospheres‟ Dynamics

Russian Academy of Sciences, Moscow, Russia

Abstract

Significant differences in the evolution of firm size distribution for various industries in the United States have been revealed and documented. For theoretical considerations, this finding puts major constraints on the modelling of firm growth. For practical purposes, the observed differences create a solid basis for selective investment strategies.

Keywords: firm size distribution, Pareto distribution, the USA, evolution, investment

JEL Classification: L11, L17, G1

Summer issue of Journal of Applied Economic Sciences

The summer issue of the Journal of Applied Economic Sciences has been published. It includes our paper "A win-win monetary policy in Canada", pp.160-180

Abstract

The Lucas critique has exposed the problem of the trade-off between changes in monetary policy and structural breaks in economic time series. The search for and characterization of such breaks has been a major econometric task ever since. We have developed an integral technique similar to CUSUM using an empirical model quantitatively linking the rate of inflation and unemployment to the change in the level of labour force in Canada. Inherently, our model belongs to the class of Phillips curve models, and the link between the involved variables is a linear one with all coefficients of individual and generalized models obtained by empirical calibration. To achieve the best LSQ fit between measured and predicted time series cumulative curves are used as a simplified version of the 1-D boundary elements (integral) method. The distance between the cumulative curves (in L2 metrics) is very sensitive to structural breaks since it accumulates true differences and suppresses uncorrelated noise and systematic errors. Our previous model of inflation and unemployment in Canada is enhanced by the introduction of structural breaks and is validated by new data in the past and future. The most exiting finding is that the introduction of inflation targeting as a new monetary policy in 1991 resulted in a structural break manifested in a lowered rate of price inflation accompanied by a substantial fall in the rate of unemployment. Therefore, the new monetary policy in Canada is a win-win one.

Keywords: structural break, inflation, unemployment, labor force, modeling

Good time to sell oil futures

In May 2011, we predicted oil (WTI) price to fall to the level of $70 per barrel by the end of 2011. This is a monthly revision for September 2011. We consider the average oil price of $84 per barrel what is equivalent to the producer price index of 244 in September. (Actual estimate will be published by the Bureau of Labor Statistics in the middle of October.)


Figure 1 compares our prediction with actual oil price in 2011. In August 2011, the predicted price is a bit higher than the measured one. In any case, we expect the price to fall by approximately $5 per month to the level of ~$70 in December 2011. We also expect the price to slowly fall through 2016 and put the uncertainty bounds for the long-term trend in oil price. The level of oil price in 2016 is between $30 and $60 per barrel. These bounds are also shown in Figure 1.

A week ago, when oil price was at ~$79 per barrel, we recommended buying oil futures. The intuition behind this idea was that $79 is approximately $5 below the expected price for September. This is a disequilibrium which should be recovered in the short run. Today, oil price is at the level of ~84. This is the equilibrium level for September. A small hike in oil price is possible during the next few days. However, at a two-week horizon, oil price should fall again. Therefore, I recommend selling now and buying in approximately two weeks or when the price will be around $75. It will grow to the level of ~$82 to $85 in October or November.

Figure 1. Oil price prediction in 2011. The price is expected to fall by $5 per month between June and December 2011. The price level is ~$70 in December 2011. We also show the range of expected price evolution by 2016.

Paul Krugman on the progress of economics

I avoide re-posting any other author in this blog. However, this post (see below in red) from Paul Krugman  deserves to be reposted one-to-one becasue I agree with many of his statements on macroeconomics. At the same time, Paul needs to make a step ahead and to look at the principal problem of macroeconomics as a science  - the absence of quantitative justification and the direct rejection of empirical proof as the tool of the macroeconomics progress. When one cannot measure the progress of a science in quantitative terms - this progress cannot be seen.  Hence, economics has to open itself for a criticism from the broader scientific society before it becomes a second rate sect, which is very close to be the truth. 

Does Economics Still Progress?



In a few hours Sylvia Nasar and I will have an on-stage dialogue at the 92nd Street Y, centered around her new book The Grand Pursuit, which offers a set of fascinating portraits of the makers of economics. (Irving Fisher invented the Rolodex?) But as I was reading her book I have to admit that I found myself wondering whether there’s much to celebrate.



I’ve never liked the notion of talking about economic “science” — it’s much too raw and imperfect a discipline to be paired casually with things like chemistry or biology, and in general when someone talks about economics as a science I immediately suspect that I’m hearing someone who doesn’t know that models are only models. Still, when I was younger I firmly believed that economics was a field that progressed over time, that every generation knew more than the generation before.



The question now is whether that’s still true. In 1971 it was clear that economists knew a lot that they hadn’t known in 1931. Is that clear when we compare 2011 with 1971? I think you can actually make the case that in important ways the profession knew more in 1971 than it does now.



I’ve written a lot about the Dark Age of macroeconomics, of the way economists are recapitulating 80-year-old fallacies in the belief that they’re profound insights, because they’re ignorant of the hard-won insights of the past.



What I’d add to that is that at this point it seems to me that many economists aren’t even trying to get at the truth. When I look at a lot of what prominent economists have been writing in response to the ongoing economic crisis, I see no sign of intellectual discomfort, no sense that a disaster their models made no allowance for is troubling them; I see only blithe invention of stories to rationalize the disaster in a way that supports their side of the partisan divide. And no, it’s not symmetric: liberal economists by and large do seem to be genuinely wrestling with what has happened, but conservative economists don’t.



And all this makes me wonder what kind of an enterprise I’ve devoted my life to.