Jun

4

The Mankiw Model has a great history for predicting where the weekly fed funds rate should be, using inflation and unemployment (two inputs which have enjoyed a tremendous track record in trading short-duration rates for many years).

The model started going off the rails about two months ago, and now calls for fed funds, currently at .09 to be at nearly 2.00. The data is on a tab in the weekly Barrons data I track in excel for on my website under the "links" tab there I believe. The tab on excel is found by hitting the F5 key.

anonymous writes: 

Ralph, I could not get the link on your website to work. The Mankiw model (from his blog) is reprinted below for interested readers:

WEDNESDAY, JANUARY 11, 2012

The Liquidity Trap may soon be over.


About a decade ago, I wrote a paper on monetary policy in the 1990s (published in this book). I estimated the following simple formula for setting the federal funds rate:

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

Here "core inflation" is the CPI inflation rate over the previous 12 months excluding food and energy, and "unemployment" is the seasonally-adjusted unemployment rate. The parameters in this formula were chosen to offer the best fit for data from the 1990s.  You can think of this equation as a version of a Taylor rule.


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