Milton Friedman's Thermostat: An Econometric Cautionary Tale

I am posting this link to Nick Rowe’s post on “Milton Friedman’s thermostat” because I teach a bit of econometrics in my “Monetary and Financial Theory” class as part of teaching about statistical objects that matter for finance such as variances and covariances. I saw this thanks to Matt Yglesias’s tweet.

Milton Friedman’s thermostat is an excellent example of how one can go wrong if the usual econometric assumptions are false. It is closely related to rational expectations econometrics.