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Thursday, April 17, 2008

Google trends, markets, economy

Viral Shah pointed me to this example of google trends being useful in thinking about price fluctuations. So that got me thinking about what interesting things one could do with it.

In the muddled monetary policy framework that we have in India today, we ricochet between the three corners of the impossible trinity. When inflation gets uncomfortable, we do exchange rate flexibility. When exchange rate flexibility gets uncomfortable, we summon capital controls. When financial markets plummet in response to capital controls, we do inflation. Some people call it a "multiple objectives framework"; I call it shock therapy. But once in this monetary policy framework, what prompts a shift from one corner to another? In a democracy, how does one choose the dates when you switch gears? I think there's an element of avoiding the corner of the impossible trinity that is the most unpleasant, based on how a large number of households and firms are screaming.

To focus on the contemporary debate of inflation versus rupee appreciation, here's what google trends shows:

Click on the picture to see it more clearly. The red line on the upper graph is the number of google searches for "appreciation". The blue line represents the number of google searches for "inflation". The story seems to be that from roughly May till December 2007, both were roughly neck to neck. From end-2007 onwards, inflation has far and away been of much more interest to the people searching on google. This is in terms of what people are searching for. In terms of these words occuring in the news (the lower graph), inflation wins hands down and has always been much more important than appreciation.

1 comment:

  1. I think a better comparison would be between "inflation" and "exchange rate". The word "appreciation" may not be a particularly good keyword in this context.

    Do it, and limit the time-frame to "last 12 months" for better resolution. You will notice the precise point at which "inflation" overtook "exchange rate" as people's concern - mid/end of March.


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