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.

Comments

  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?

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    Replies
    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.

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

      Delete
  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?

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    Replies
    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.

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