Do you remember Friedman’s “plucking model”?

Clark Johnson’s paper on the Great Recession has reminded me of Milton Friedman’s so-called “Plucking model” as Johnson mentions Friedman original 1966 paper on the Plucking model. I haven’t thought of the Plucking model for some time, but it is indeed an important contribution to economic theory which in my view is somewhat under-appreciated.

At the core of the Plucking model is that the business cycle is asymmetrical. If you studies modern day textbooks on Macroeconomics it will talk about the “output gap” as it is something we can observe in the real world and a lot of econometric modeling is done under the assumption that real GDP move symmetrically around “potential GDP” over time.

The idea in the Plucking model is, however, that the business cycle really can’t be symmetrical as no economy can produce more than at full capacity. Hence, all shocks in the model will have to be negative shocks – or shocks to the potential GDP. Simply expressed negative shocks are demand shocks and positive shocks are supply shocks – and Friedman assumes that the demand shocks dominates.

A numbers of older and relatively new research confirms empirically the the Plucking model, but for some reason it is not getting a lot of attention.

A key implication of the Plucking model is that there is not correlation between the extent and the size of the “boom” prior to a crisis and how fast the recovery is afterwards. The implication of this is that the idea of “The New Normal” where we will have to have lower growth in the coming years because of “overspending” prior to the crisis simply does not find support in economic history.

Here is a recent interesting paper that finds empirical support for the Plucking model – including for the period covering the Great Recession.

Needless to say – Austrian business cycle fanatics do not agree with the conclusions in the Plucking model…

More research on the Plucking model would be interesting and it would be interesting to see how Market Monetarists can learn from the model.

Open-minded Brits – and Austrians

American Alex Salter is a good example of the open-minded Austrians who has welcomed the dialogue with Market Monetarists. In my own part of the world Austrians is also engaging us in a serious fashion. A good example is Anthony Evans – self-declared Austrian, monetary specialist and Associate Professor of Economics at London’s ESCP Europe Business School, and Fulbright Scholar-in-Residence at San Jose State University.

Anthony is endorsing a NGDP target for the Bank of England. See his latest comment from City A.M. here. See also this earlier comment.

In general it is interesting how British monetarists as well as British Austrian school economists seem to be much more open to Market Monetarist ideas than their counterparts in the US and in continental Europe. In that regard it should be noted that the Bank of England probably is the central bank in the world that is taking NGDP targeting most serious.

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