There are various ways of estimating potential output. I typically refer to the CBO’s estimates, which are basically a production function approach (use trend labor and capital stock, and total factor productivity growth, to infer potential output). However, An alternative is to examine price pressures to infer potential output, as in Ball and Mankiw (JEP, 2002).
Category Archives: Federal Reserve
“…inflation expectations can change quickly”
One of the arguments for acting sooner rather than later on monetary policy is that if the slack disappears, inflationary expectations will surge. That’s represented in this quote from reader Peak Trader’s comment. While I don’t rule out this possibility, it seems reasonable to me to empirically assess whether this is true for the United States over the past thirty years.
What the Taylor Rule(s) Say(s)
The St. Louis Fed has a handy webpage where it shows the Taylor-rule implied Fed funds target rate given measures of the output and inflation gaps, and the natural real rate of interest. Here’s recent snapshot I downloaded for my classes.
Preparing for lift-off
The strong October employment report makes it look likely that the era of zero interest rates will soon come to an end, at least for the United States.
Continue reading
Today’s Employment News and Asset Prices
Just an observation regarding the impact of the employment “news” (see [CR]) and inferred expectations of a rate hike in December, and the announcement effect on the dollar’s value.
How Are Emerging Markets Responding to Anticipated US Tightening?
Just back from England and a couple of presentations, one at the CCBS on the Trilemma and monetary policy spillovers. Here are three graphs, related to the presentation, which illustrate how policymakers in different emerging market countries are responding to the stresses their economies are undergoing.
Outsourced Monetary Tightening
From Zeng and Wei in the Wall Street Journal today:
Central banks around the world are selling U.S. government bonds at the fastest pace on record, the most dramatic shift in the $12.8 trillion Treasury market since the financial crisis.
Forecasting interest rates
There was lots of action in financial markets last week, with much of the attention focused on the U.S. Federal Reserve. The interest rate on a 10-year U.S. Treasury bond edged up 10 basis points early in the week in anticipation that the Fed might finally raise its target for the short-term interest rate. But it shed all that and more after the Fed announced it was standing pat for now.
Price of CBOE option based on 10-year U.S. Treasury yield; to convert to the Treasury yield itself divide by 10. Source: Google Finance.
Continue reading
Liftoff: Empirical Assessment of the Implications for the Dollar
I have been stressing the international implications of a potential interest rate increase as a rationale for deferring monetary tightening. Export growth is slowing and economic activity in the tradables sector (manufacturing output, manufacturing employment) as the dollar has appreciated. [1] [2] How much more appreciation should we expect should the Fed tighten?
Government Debt Crowding Out Watch, Fall 2015
As I updated my slides for teaching an economics course on the financial system at UW-Madison, I recreated this graph, which depicts the rise in Federal debt as a share of GDP, and the trajectory of real interest rates, as proxied by several measures.