Monday, August 23, 2010

Krugman reestimates the Mankiw rule

This scatterplot is from Paul Krugman.  x is the core inflation rate minus the unemployment rate.  y is the federal funds rate.  It uses data from 1988 to 2008.

This graph is motivated by a version of the Taylor rule I once proposed.  Paul uses a different sample than I did, so he gets slightly different parameter values.  Nonetheless, I think Paul and I agree that this equation provides a reasonable first approximation to what the Fed will and should do in response to macroeconomic conditions.