A theoretical assumption linking current growth and long-term interest rate expectations combined with two interest-rate calculations of monetary stance get you to an r-square of nearly 75% in predicting recessions.
Monetary Stance Metric + Yield Curve Spread = Powerful Tool
If you haven't built a "probit" (probability unit) model in more years than you care to admit publicly, like me, then the amazing world-wide web provides a rescue, in the form of some fairly decent guidelines.
Another model, assuming "NAIRU* of the 1990s", answers the eternal question of what the level of policy rates should amount to:
Federal funds rate = 8.5 + 1.4 (Core inflation - Unemployment)
*NAIRU is that rate of unemployment below which the inflation rate will begin to accelerate. In the 1990s, it fell, for structural reasons that no one has pinpointed exactly (that I know).
Saturday, September 22, 2007
It couldn't be THAT simple, right?
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