The graph Bernanke should look at before ‘exiting’ anything

Here is the Federal Reserve’s mandate:

“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”

I don’t think it is the greatest mandate in the world, but it is the Fed’s mandate nonetheless.

I tried to estimate a simple reaction function for the fed based on “employment” (rate, Civilian Employment-Population ratio) and “prices” (PCE core inflation).  The estimation period is 1990 to 2007. 2008-13 is forecast.

Mankiw rule

Take a look at the forecast. The model is “forecasting” that the Fed funds target rate should be -7%!

I will leave it to my readers to judge whether the fed should ‘exit’ its quantitative easing programmes or not.

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  1. A good example of where economics has gone wrong – approaching the subject from the perspective of mathematics rather than people. We are in our third Bernanke bout of QE, Fed “assets” have more than tripled and the economy has done nothing but shrink. What is the link between interest rates and the economy? It is hard to see one. It is just not possible to provide stable prices and full employment. That is a fiction that allows the central bank to pursue any course it wants to, regardless of the cost. The result is a massive transfer of wealth from the only people who must spend, retired people ( who depend on fixed interest) to those overpaid racketeers on Wall St. It gets worse though: far from providing stable prices, the Fed has engineered yet another bubble in the stockmarket without lowering unemployment. Raising interest would more than likely increase aggtregate spending and get rid of much of the dead wood on Wall St. Sure, it would not be pretty but it is the only way that we could possibly move out of the economic morasse we are in. See this video of an interview with Jeremy Grantham:

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