Testing Arnold's Dual Inflation Regimes Hypothesis
By Bryan Caplan
Arnold has a novel theory of dual inflation regimes:
I don’t think that the Fed can fine tune the economy. I think that, at
most, it can toggle between two regimes: a regime where inflation is
high and variable; and a regime where inflation is low and stable.
This seems testable by optical least squares. If we get data on a bunch of countries over the last 60 years, put mean inflation on the x-axis, and inflation variance on the y-axis, there will be two easily visible clusters. I’d like to run the test myself, but I can’t easily find the data (or better yet, a pre-made graph). Help!
P.S. If you want to allow individual countries to shift regime, one easy place to start is to break each country’s results down by decade, yielding N*6 total decade-long “regimes.” If you make the time periods much shorter Arnold probably needs a new label for his hypothesis…