Janet Yellen and "Optimal Control" for the Fed

Page 1 of 1 [ 3 posts ] 

ArrantPariah
Veteran
Veteran

User avatar

Joined: 30 Mar 2012
Age: 117
Gender: Male
Posts: 7,972

10 Nov 2013, 11:52 am

http://finance.yahoo.com/news/ready-opt ... 08186.html

Quote:
...This approach starts with a forecast for the economy, and then solves a large-scale macroeconomic model to find the path of the funds rate that minimizes the deviation of inflation and unemployment from their respective targets. The Federal Open Market Committee (FOMC) targets an annual inflation rate of 2% over the long run and an unemployment rate of 6% (the latter number an estimate of the economy's "natural" unemployment rate). Under the optimal control approach, the central bank would then use a model to calculate the optimal path of short-term interest rates in order to hit these targets. As long as unemployment is further away from the target level than inflation, then monetary policymakers would keep interest rates low in an attempt to correct this, even if it means inflation runs slightly above target for a while.


Your comments?



GGPViper
Veteran
Veteran

User avatar

Joined: 23 Sep 2009
Gender: Male
Posts: 5,880

10 Nov 2013, 12:56 pm

It is interesting to see that the NAIRU (non-accelerating inflation rate of unemployment) is now estimated as being 6 percent. When I took my economics classes in 2005, the prevailing figure was 4.5 percent.



ArrantPariah
Veteran
Veteran

User avatar

Joined: 30 Mar 2012
Age: 117
Gender: Male
Posts: 7,972

10 Nov 2013, 8:57 pm

It does seem odd that that unemployment would count for much, given that real wages have been declining for many years.