The Mankiw Rule uses core CPI, which is CPI excluding food and energy and also factors unemployment into the equation. The formula for the Mankiw Rule is:
Federal funds rate = 8.5 + 1.4 (Core inflation – Unemployment)
From Jim Bauerle, on the question of why the Mankiv formula seems to be abandoned by the Fed:
To...[the]...question, "what has changed, the formula or the rigor?" the answer is both.
When you let all the air out of a balloon at once, you lose control of the balloon. Especially if the balloon is $4.5T, which is the size of the Fed's balance sheet these days.
When you let all the air out of a balloon at once, you lose control of the balloon. Especially if the balloon is $4.5T, which is the size of the Fed's balance sheet these days.
Unprecedented.
The balloon's size is direct result of Fed's intervention in 2008 to stave off collapse of G-20 economies. Same day Lehman Bros filed Ch. 11, GE CEO visited Treas. Sec'y Paulson to say GE could not refinance its commercial paper (borrowings) for any longer duration than one day! So U.S. Gov't made GE a bank holding company during wee hours of next morning in order that GE could borrow directly from Fed. That is how close we came to Armageddon.
See https://www.propublica.org/special/paulson-ge-timeline
The balloon's size is direct result of Fed's intervention in 2008 to stave off collapse of G-20 economies. Same day Lehman Bros filed Ch. 11, GE CEO visited Treas. Sec'y Paulson to say GE could not refinance its commercial paper (borrowings) for any longer duration than one day! So U.S. Gov't made GE a bank holding company during wee hours of next morning in order that GE could borrow directly from Fed. That is how close we came to Armageddon.
See https://www.propublica.org/special/paulson-ge-timeline
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www.propublica.org
In his book about managing the financial crisis, former Treasury Secretary Henry Paulson recounts conversations with Jeffrey Immelt, the CEO of General Electric ...
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Fed is still unwinding that unprecedented step--one of the last pieces to go is reducing the bond holdings of the Fed. But if the Fed moves too quickly, there will be severe adverse consequences, including bank insolvencies because some banks have overexposed themselves to low-rate bonds, which lose value in a rising-rate environment.
Too, fiscal policy (set by Congress) has been unavailable as a tool because of the inability of Congress to agree on whose ox gets gored. Republicans protect the Pentagon; Democrats social services and transfer payments to poor. Health care funding debate reflects the stalled state of the federal budget process. So Fed is a one-armed paper hanger and has been for last decade. And those conditions, taken together, are the biggest reason why Mankiw formula is of diminished utility today.
.... one can think of this as a chemical equation: it must balance and if you change one side, you have to anticipate how it will change the other side. Or the human body: reversing sequential organ failure once it starts is a long, slow and difficult process. ....
We are still unwinding 2008.
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