The Financial Times recently reported that, according to internal analysis prepared for the Fed’s last policy meeting, the ‘ideal’ interest rate in the US should be minus 5%. The analysis was based on the so-called Taylor rule, which is often used as a benchmark for the appropriate interest rate based on divergences between actual GDP from potential GDP (or the output gap) and expected or actual inflation rates from target inflation rates. Of course a central bank cannot reduce interest rates below zero. Still, calculations like these give a rough idea of the extent of unconventional measures needed to stimulate the economy.
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