Correction on the Mankiw Model

I have to apologize. I made a mistake in a post from last week in calculating the interest rate based on Professor Greg Mankiw’s interest rate model.

His model for where the Fed funds rate ought to be is:

Federal funds rate = 8.5 + 1.4 (Core inflation – Unemployment)

In my original post, I said that the model finally indicated that the Fed should have positive interest rates. A reader caught my error. The corrected model is below and it shows that interest rates according to the Mankiw model are still negative, although they’ve risen considerably in the past few months.

The model is the blue line and the actual rate from the Fed is the red line. At the current inflation rate, the unemployment rate needs to drop to 8.3% from the current 8.5% for the model to signal positive rates. We’re getting close.

Posted by on January 10th, 2012 at 1:53 pm

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