Guess That Graph!

So here’s something fun, and I promise you I am just doing this because I am trying to incite a big argument to attract traffic because things are so dull here and don’t intend to make a habit of the thing I am not telling you what I’m doing.

Let’s play a game. It’s called Guess That Graph! I’m going to display a graph, unlabeled and uncaptioned (yeah, I know, not that different from what I usually do 😉 )  and I won’t say what it depicts (okay one hint: it’s not a climate graph). Let’s see if people can guess what it actually shows. I’m going somewhere with this, I promise, but I don’t know that I am going to want to do this sort of thing on this blog in the future. Hm, maybe another blog…Anyway:


So. Guess that graph!


11 Responses to “Guess That Graph!”

  1. None Says:

    Some kind of commodity production change/price curve ?

  2. timetochooseagain Says:

    Well I guess you could say it is a graph of a price of a kind. But not exactly.

  3. None Says:

    Hits zero in approx 2008 – something to do with Democrats/Obama ?

  4. timetochooseagain Says:

    Nah, this is really more bipartisan spaghetti.

  5. None Says:

    Something to do with federal funds / inflation ?
    Off to bed.

  6. None Says:

    ie I think the blue is clearly the federal fund rate, not sure what red is.

  7. timetochooseagain Says:

    Bingo on the blue line. Should I just say what the red line is?

  8. HR Says:

    US inflation rate (only because I know how to use Google)

  9. timetochooseagain Says:

    Are you guessing what the red curve is? Because that isn’t it. I mean, you *are* on to something, though.

  10. None Says:

    Just got back from a weeks holiday. Yes just say what it is imo.

    • timetochooseagain Says:

      The answer is that, in 1992, the economist John Taylor proposed that, based on some economic modeling, monetary policy ought to follow a simple rule, the original formulation of which was (algebraically simplified):

      r = 1.5*p + 0.5*y + 1

      Where r is the fed funds rate, p is the inflation rate over the previous 4 quarters (based on the GDP deflator) and y is the “output gap” (% deviation from a trend). He then showed that the rate was very close from 1987-92 (which, as you can see above, I have replicated).

      That is, if you go to:

      a plot up GDPDEF as percent change from a year ago, ((GDP/NGDPPOT)-1)*100, and the fed funds rate, then download the data in the graph, and use the formula above, you get where the fed funds rate (FEDFUNDS) “should” have been set according to the Taylor rule. If it is below that for a lengthly period of time, policy is too loose, above, too tight (at least, if we take the Taylor rule to be a good benchmark). (If the rule dips below zero, this leads to a “need” (again, according to the rule) for discretionary actions like QE-and, very briefly, we “needed” something like that, according to the rule. But presently, the place the rate “should be” is above where it is, not below zero. You can’t justify continuing to engage in endless discretionary action by the Fed on this basis.

      Which is kinda funny, because in March of 2011, Bernanke claimed he was justified in his actions by the Taylor Rule being “way below zero”. Just to be sure, Pat Toomey (R-PA) asked him if Taylor himself believes that to be true (he does not). Bernanke then claimed Taylor changed to a very different rule in 1999 (he did not).

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