Awesomenomics at the Zero Bound

Economics Economics Questions
1

This question started as a comical rant on my journal.

http://michaelduff.livejournal.com/395650.html

Here’s the crux of the issue:

The Rudebusch version of the rule is:

Target fed funds rate = 2.07 + 1.28 x inflation - 1.95 x excess unemployment

where inflation is measured by the four-quarter change in the core PCE deflator, and excess unemployment is the difference between the actual unemployment rate and the CBO estimate of the NAIRU, which is currently 4.8 percent. This rule describes past Fed policy quite well.

Applied to current data, the rule says that the Fed funds rate should be — drum roll — minus 5.6 percent. You can’t do that, of course, so we’re very hard up against the zero lower bound.

I’ll confess to being a novice here, but please guys, as the guardians of rationality and common sense in economic thought, tell me I’m not crazy.

Confirm that any formula that ends up recommending negative interest rates is nonsense and deserves to be treated like nonsense.

2

keke. Austrians don’t believe in equations usually.

The reason we oppose the federal reserve is for conceptual reasons as opposed to that they violate some equation we’ve come up with. There’s a lot of articles about it on mises.org. Just search federal reserve.

3

If you want a utilitarian response:

A negative interest rate encourages consumption (“consumption” strictly speaking, is the destruction of material resources) now rather than in the future, because the money is bound to be worth less in the future. It results in a consumption shift as future purchases are brought to the present instead.

This is also generally true if the nominal interest rates are lower than time preference (people’s willingness to sacrifice present consumption in order to save/invest in the future).