What Should the Fed Funds Rate Be?

Harvard Econ Professor (and blogger) Greg Mankiw came up with a nifty equation of determining what the Fed Funds rate ought to be.

Federal funds rate = 8.5 + 1.4 (Core inflation – Unemployment)

In July, the unemployment rate was 4.647%. The core CPI was 2.210%. That translates to a Fed Funds rate of 5.088%, which is below where the Fed is now. Here’s a look at how the Mankiw Rate compares with the real Fed Funds rate over the past few years.
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One small problem with this method is lag. The latest month we have data for is July. The August CPI will be coming out next week. (I also had a minor technical criticism of Mankiw’s equation.)

Posted by on September 11th, 2007 at 2:57 pm


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