How fast is slack consumed? How can we measure the speed at which slack is consumed? We can use capacity utilization and unemployment to set up a simple measure for consuming slack by dividing capacity utilization by the unemployment rate in terms of percentage change year-over-year. (Thanks to Alan Thomson at Terra Firma Financial who […]
In a speech by Janet Yellen on April 11, 2012, she talked about her preferred version of the Taylor rule to determine the Federal Funds rate. The Taylor (1993) rule calls for the federal funds rate to begin rising in early 2013, whereas the Taylor (1999) rule has its liftoff in early 2015, a lot […]
I posted a graph where I overlaid the Effective Demand rule over the Taylor rule variations done by Tim Duy. You can see differences between the rules since the crisis. Why the difference? And does the difference matter? Basic Taylor rule Target Fed rate = natural real rate + inflation + 0.5*(inflation – inflation target) […]
The San Francisco Fed has a paper, Assessing Expectations of Monetary Policy, where they make a case that the market expects monetary policy to be more accommodative than the Fed is projecting. How could that be when the Fed has been so aggressively accommodative until now? Shouldn’t they tighten already? In my view, the market […]
It is commonly known that the CBO projects potential output, but they also have 2 measures for the natural rate of unemployment… a Short-term & a Long-term rate. (link) The description at FRED economic data says… “The natural rate of unemployment (NAIRU) is the rate of unemployment arising from all sources except fluctuations in aggregate […]
Tim Duy posted a graph of various rules to determine the base nominal interest rate of the Federal Reserve. Here is the graph that he posted. (link) The graph includes versions of the Taylor rule and the modified Taylor rule used by Glenn Rudebusch at the Federal Reserve Bank of San Francisco. Now I will […]
What is the primary error in macroeconomics? Potential output… and this error is huge. The measure of potential output is the foundation for many calculations. Natural real interest rate Natural level of unemployment Monetary policy Slack If you get these wrong, there will be problems. Paul Krugman wrote an article for the IMF, Increasing Demand. […]
I have been reading the ebook on Secular Stagnation. It is interesting that two sections in the book have the titles… Three Issues: Potential Growth, Effective Demand and Sclerosis Further on Effective Demand Great! We see the term Effective Demand being used. Yet, Effective demand is never defined in the book. Moreover, the term is […]
The ECB raised its benchmark rate in 2011 from 1.0% to 1.5%. Since then the rate has moved down to 0.15%. After their benchmark rate was raised in 2011, the Euro area went into a recession. Did the ECB cause the recession by raising their benchmark nominal rate? Some say yes. I say the story […]
Do these books include Keynes’ precious term, “Effective Demand”? ¯\_(ツ)_/¯ I watch as grand economists explain the current economy… in particular, Olivier Blanchard and Paul Krugman. They miss the eventual fight of labor to increase their share… Olivier Blanchard wrote an article, Where danger Lurks. He mentions the Dark Corners where the economy can function […]