Krugman, Taylor Rule and Okun's Law

Very interesting post by Paul Krugman on why the Fed should not raise rates anytime soon.
Solving the Taylor Rule for a Fed Fund Target of 0% and the current inflation rate gives the unemployment rate level at which the fed should start raising rates.

The table below shows the different unemployment rates at which the fed should tighten assuming different inflation rates.

Change in PCE 0.0% 0.5% 1.0% 1.6% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% Unemployment 5.8% 6.2% 6.6% 7.0% 7.3% 7.7% 8.1% 8.4% 8.8% 9.2% 9.6%

Mr Krugman then looks at Okun's law which says that GDP growth 2 points above potential of 2.5% reduces unemployement by 1% and concludes: "So say we have 5 percent growth for the next 2 years — which would be hailed as a stunning boom. Even so, unemployment should fall only 2.5 points, to 7.3. In other words, even with a really strong recovery (which almost nobody expects), the Fed should keep rates on hold for at least two years."

Three Charts on Inflation

First Annual Inflation and Capacity Utilization:


Then Monetary Base and CPI 1982 to 2008


Finally the same from 1982 to 2009. What kind of impact will this hockey stick have on the price level?

Inflation and Quantitative Easing

Econbrowser starts to worry about inflation. He posts the following chart of various commodity prices since the Fed announced its QE stance on March 18 and concludes: "But this is a trend the Fed needs to watch closely from here, and could prove to be a significant limiting factor on how much the Fed can hope to achieve from monetary stimulus. Because I for one do not think it's a good idea to call for a replay of the 2008:H1 commodity market show"


Interesting how Gold did not move compared to industrial metals.

"A History Lesson" from Paul Krugman

For those who fear inflation Prof Paul Krugman has the following history lesson on Japan's lost decade. In spite of large deficit and strong monetary expansion no sign of inflation and no currency devaluation either. Will the same happen to the US though?

QE, Government Expenditures and Inflation

A very instructive weekly commentary by Mr John Hussman. His definition of inflation "Inflation basically measures the percentage change in the ratio of two “marginal utilities”: the marginal utility of real goods and services divided by the marginal utility (mostly for portfolio and transactions purposes) of government liabilities" and the examples he gives are worth keeping in mind. The following charts are particularly interesting.
First Monetary base and inflation:

Then Government expenditures and inflation: