Interest Rate Quells Unemployment but Not Inflation

Abstract

Our data-driven results are: (1) The nonsignificant correlation of -.2094 (probability = .2946) between inflation and interest rate over the trans-century period 1991-2017, demonstrating the extreme difficulty in quelling inflation. (2) The highly significant correlation of -.7035 (probability = .0000) between unemployment and interest rate over this same period.

Interest, unemployment, and inflation rates are percents, which are the most powerful calibrations in economics, medicine, and physics. Rate measurements may not be rescaled by multiplicative and additive constants, as can less stringent interval scales common in the social sciences. Finally, the data-dependent findings brought by Stata commands (1) and (2) generalize beyond interest, unemployment, and inflation rates to all social and data-science variates.