Skip to main content

The natural rate is 6.5%

At least according to the Fed's new press release. The release says:
"the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal."
So if unemployment falls below 6.5% expect higher rates of interest, associated to what would be in Bernanke's view the risk of excess demand.

Note that the inflation target continues to be 2%, so even Blanchard's mild-mannered rethinking of macroeconomics (that Krugman and others having been pushing) for a higher inflation target has not been accepted by Bernanke. Obama should get rid of Bernanke next time he has the chance.

PS: In contrasting news the Reserve Bank of India seems to be suggesting, at least according to The Economist, that it would raise its inflation target above 5%. Good for them.


  1. Well, in Bernanke's defense, Mankiw's version of the Taylor rule would imply a positive rate a bit above 2 with 6.5% unemployment and 2% inflation, so in that sense the policy being described here is a bit more exapnsionary than Greenspan's.

    What I'm wondering is, does this really represent a change? And, what's the theory behind it? Why do Blanchard, Bernanke, Krugman, etc. think that demand has fallen so much that with zero interest rates unemployment remains at or above 6.5 percent?

    1. Hi JW:
      I would say no. My point precisely that even if you want to call a higher inflation target a change (which I wouldn't), this hardly qualifies. It's far from clear that at 6.5% demand pull inflation will kick in. In fact, with the same level of labor force participation as in the late 1990s, now we have considerably more than 7.9% unemployment. Closer to 12% in the last calculations I publish in the blog. So we are really far from full employment indeed.

    2. I mean 7.7%. Oops. But the point remains, a good chunk of the decline in unemployment is due to reduced participation rates.

  2. Falando de taxa natural.. Na minha prova de IS-LM eu acho atribuí à ISLM uma taxa de juros "natural" que equilibra para o pleno emprego, mas to meio desconfiado se errei (ainda nao vi a nota)

    eu me confundi em algo? ja que na ISLM ha politica de base monetaria nao de taxa de juros, ou seja, se muda a Base monetaria e a taxa de juros "natural" converge para um nivel menor (oferta e demanda) é isso mesmo ou to errado?

    1. Certamente o Hicks (e o Modigliani) tinha uma taxa natural no modelo. Ou seja, fora a possibilidade da taxa ser negativa ou uma armadilha da liquidez, com flexibilidade de precos e salarios o sistema chegaria ao pleno emprego.


Post a Comment

Popular posts from this blog

What is the 'Classical Dichotomy'?

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible
There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Aust…

A brief note on Venezuela and the turn to the right in Latin America

So besides the coup in Brazil (which was all but confirmed by the last revelations, if you had any doubts), and the electoral victory of Macri in Argentina, the crisis in Venezuela is reaching a critical level, and it would not be surprising if the Maduro administration is recalled, even though right now the referendum is not scheduled yet.

The economy in Venezuela has collapsed (GDP has fallen by about 14% or so in the last two years), inflation has accelerated (to three digit levels; 450% or so according to the IMF), there are shortages of essential goods, recurrent energy blackouts, and all of these aggravated by persistent violence. Contrary to what the press suggests, these events are not new or specific to left of center governments. Similar events occurred in the late 1980s, in the infamous Caracazo, when the fall in oil prices caused an external crisis, inflation, and food shortages, which eventually, after the announcement of a neoliberal economic package that included the i…