Monday, April 27, 2009
Negative Interest Rates Anyone?
According to an article in today's Financial Times, a Fed memo indicates that the best interest rate for the inflation/unemployment conditions today is -5%. Of course, a negative interest rate is not possible. The estimate of -5% comes from the Taylor Rule, which is a monetary rule that prescribes how a central bank should adjust its interest rate in response to macroeconomic developments. An article by an economist at the Fed explaining Taylor Rules can be found by googling Taylor Rule. Greg Mankiw had a piece in the New York Times on the need for a negative interest rate and how to achieve it. The fact that interest rates cannot literally be negative is part of the argument that the current situation needs fiscal stimulus.