Saturday, April 16, 2011

Request for feedback from Trader's Crucible

Trader's Crucible is working on an MMT fiscal policy rule and requests feedback:

I woke up this morning and had a bit of time to thing about a fiscal policy rule for MMT.

c(u-u) + (i-i) + f*Population Growth = %G [Update: This is %G Deficit]

Where :

c(u-u) is Okun’s law, relating the change in GDP to change in unemployment. According to most people, c is about 1.8 and (u-u) is the difference between the “natural” rate of unemployment and current unemployment.

(i-i) is the difference between the current core inflation rate and the target inflation rate
% Population growth is for the entire currency area – we might want to include China in this area given the current policy of China. f is a multiplier, set to 1 for now.

Note this rule also spits out projected rates of inflation. %G is the target rate, but we know the actual rate of %. The difference between the two should be the observed inflation rate.
What do you all think?

[Update: probably needs to be some adjustment for spending multipliers]

UPDATE: TC updates in a new post, based on feedback and comments to the first post. Good thinking. Take a look.

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