The ‘Unnatural Rate of Interest’

By Joseph T. Salerno – Re-Blogged From Stockman’s Contra Corner

A few days before the last FOMC meeting The Wall Street Journal  reported on the Fed’s hand-wringing over its inability to identify the “natural rate of interest” and explain its recent movements. According to the report, the Fed uses the “mysterious natural rate” to guide its decisions in setting the target for the fed funds rate. Modern macroeconomics defines the natural rate of interest as the (real) rate of interest that maintains the economy in a Keynesian state of bliss, with stable prices (or moderate inflation) and actual real GDP equal to “potential” or full-employment GDP.

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