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Phillips Curve Musings

A few months ago, I wrote a draft version of a blog post on the US Phillips curve. One of the advantages of using Macrobond is that all my charts get updated automatically when new data is out, so no additional work there. However, my writing does not. The current Corona shock has been so unprecedented that it has distorted a lot of economic data, including the Phillips curve relationship. Let’s have a look!

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Fat Tails and Asymmetric Shocks Part 2: Economics

One of the key assumptions in modern macroeconomics theory is that shocks are symmetric. Conventional macro suggests that output evolves along a path of exponential growth and that the business cycle is the result of exogenous shocks that disturb the system. Moreover, the economy is assumed to be stabilizing so that it returns to equilibrium after the initial shock has propagated through the system. Over time, the law of large numbers suggests that the economic system is equally likely to be hit by a positive or negative shock. Therefore, deviations from trend output should a priori follow a normal distribution.

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