ECON-002 Lecture Notes - Lecture 21: Federal Funds Rate, Real Interest Rate, Potential Output
5 Jun 2017
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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. Ratio of employment/population nudges upwards by 0. 1 percentage point. This means that the decline in employment is actually good news. 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. Long-run real interest rate (r*) - 0. 5*target inflation rate ( *) + 0. 5*gdp gap. F = r* - * + 0. 5 gap + 1. 5 . *: inflation target (preferences of fed: cushion against deflation: r=nominal interest rate - . Negative raises r: labor market adjustment. 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.
