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Just recently, in a speech at Stanford on 19 January, she discussed how current Fed policy compares to several simple policy rules.
Looking forward, she contrasts the implications of the rules with the FOMC members’ projections for the federal funds rate.Along with the lower potential and trend growth, the equilibrium rate estimate declines.Consequently, using the consistent medium run estimates of R-Star and the output gap, the federal funds rate prescriptions from the consistent Yellen Taylor rule turns out to be quite a bit higher than when the long-run NAIRU-based output gap is used.Her services are pricey: Getting in the door costs $2,500; “basic premium” matchmaking memberships start at $35,000; and VIP packages, featuring wardrobe consultations, date planning and “romantic concierge” services, can extend into the hundreds of thousands of dollars. But Western people who see Hye Jung in the American movie Wedding Palace all love her in it. However, Chair Yellen also suggests an important role for estimates of medium-run equilibrium real rates.
Such estimates are extremely uncertain and sensitive to technical assumptions, and thus should not be used as key determinants of policy stance.
Here’s the formula: Fed Funds Rate = R-Star Target 1.5 (Inflation – Target) 0.5 (Output Gap) The equilibrium funds rate is simply the sum of the long-term equilibrium real rate, the ‘infamous’ R-Star, and the target rate for inflation. For inflation, the 2% value actually coincides with the Fed’s longer-run goal made public in 2012 and measured with the PCE (Personal Consumption Expenditures) Index.
For R-Star, Taylor (1993) used trend GDP growth, which stood at 2.2% between 19.
A deeper trough and longer-lasting negative output gap would have implied substantial deflation according to the estimated Phillips curve.
Absent deflation, potential is revised down and the output gap is revised upwards.
As shown by the orange line in Figure 3, it declined sharply with the recession in 2008/2009 and has hovered near zero since then.