Dust flux, Vostok ice core

Dust flux, Vostok ice core
Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

Wednesday, April 18, 2012

US real interest rates falling--unemployment too. Is Bernanke right?


First the graph.

This graph of unemployment rate against real interest rate should not exist in this form, according to generally accepted Keynesian theory, which tells us that at low interest rates, there is one equilibrium state for unemployment--and that is low.

Unfortunately reality seems to be painting a different picture--that of multistability. Many natural systems have more than one equilibrium point, and one's ability to choose which equilibrium is manifested in a complex system is limited. Which equilibrium appears is a function of the entire history of the system, so that simply hammering it with low interest rates won't necessarily give you the desired result, Ben.

In the last couple of months, real interest rates have swung sharply negative, in response to rising inflation (as reported on the BLS website). In my graph above I have used the annualized rate of the CPI for all urban consumers, calculated monthly. I have used a three-point moving average for the real interest rate to reduce the volatility.

Unemployment has fallen, but not because a lot of people are finding work. Instead BLS has eliminated a lot of "discouraged workers" from the work force.

If you can't force reality to conform to your economic models, at least you can fudge the data.


  1. Very interesting -- I wonder whether running your inferred real interest rate against U5 or U6 rather than headline U3. If I understand the point of your plot, we should see the new stability area to be better defined, no?

    It's not exactly clear how you calculated your inferred real interest rate -- specifically, what did you subtract CPI from?

  2. CPI was subtracted from the secondary market rate for three-month treasuries (carried as DTB3 on the BLS site). I forgot to include it in the above discussion.