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Taylor Rule vs. Fed funds

The fed tends to justify its decisions with econometric models. One of them is the Taylor rule, which takes as inputs the difference between current inflation and target inflation, and economic growth, measure by gdp. As can be seen below, the Taylor rule would suggest a fed funds rate of close to 10%, more than double the current official rate. This model was not followed during the years of #zirp, since the fed never went negative on nominal rates, and it may not follow it to the other extreme, but it’s highy likely that the gap between model and fed funds will close.


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