ECON-002 Lecture Notes - Lecture 21: Federal Funds Rate, Real Interest Rate, Potential Output

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5 Jun 2017
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April 11th, 2017
The Employment Situation for March 2017:
u3 = 4.5% (know this for exam, but for the month of April)
-part-time economic reasons (PTER) workers: decreased 151,000
-marginally-attached workers: fell by 128,000
-LFPR steady at 63%
-ratio of employment/population nudges upwards by 0.1 percentage point
-this means that the decline in employment is actually good news
-CES Jobs = 98,000?
Monetary Rule:
Defined: how Fed reacts to inflation and to other macro changes
In an equation:
y = mx + b
R = z + 0.5*pi
z is the intercept of the graph
Taylor’s Rule:
Nominal federal funds rate (F) =
Long-run real interest rate (R*) - 0.5*target inflation rate (π*) + 0.5*GDP GAP
+ 1.5*Inflation Rate (π)
F = R* - π* + 0.5 GAP + 1.5π
R*: Spending Allocation Model
π*: inflation target (preferences of Fed)
1. Cushion against deflation: R=Nominal interest rate - π
-Negative π raises R
2. Labor market adjustment
GAP = (Y-Y*)/Y*
-THIS TERM IS TROUBLE
-it is hard to estimate in real time what the GDP Gap is
-the source of the trouble is estimating potential GDP
-it is hard to tell in real time what is happening to potential GDP
Change in intercept (z) shifts the monetary rule curve (up or down)
-find the new R at the same inflation rate
Change in R* merely is a movement along the curve
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