Short and Variable Lags

Robert Waldmann

Casual discussion of macroeconomics suffers from the fact that one can get any result one wants by playing with lags. I’m not saying that I think formal econometrics adds much. However, things could be worse. Discussion of the ups and downs of the stock market is even weirder.

Courtney Schlisserman at Bloomberg seriously suggests that Paul Krugman’s guess as to when the trough will come explains a shift in stock prices larger than any that can really be justified ex post by anything ever.

“I would not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer,” he said in a lecture today at the London School of Economics. “Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilizing.”

U.S. stocks erased an earlier decline after Krugman made his comments. The Standard & Poor’s 500 Stock Index was little changed at 939.14 at 4:07 p.m. in New York after slumping as much as 1.5 percent earlier, and the Dow Jones Industrial Average gained 1.36 points to 8,764.49.

This is less ridiculous than the average explanation of stock market gyrations. In fact, it seems to me horribly possible that Schlisserman is right.

Can anyone explain why anyone ever took the efficient markets hypothesis seriously ?