Comparing Effective Demand rule to other rules

Basic Effective Demand Limit, L = labor share index * 0.76

Effective demand on real GDP = rGDPeT/L (1 -(1 - 1/e)T/L)

Effective Demand Monetary rule with NGDP targeting = z(T² + L²) - (1 - z)(T + L) + (1+a)current core inflation + acore inflation average - 2acore inflation target

z = (2L + Natural real rate)/(2L² + 2L) ............................ T = capacity utilization*(1 - unemployment rate)
UT index = L - T ... (UT index goes to zero at limit of business cycle.)

New economic thinking... effective demand limit upon the utilization of labor and capital

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09/04/2014

Comparing Effective Demand rule to other rules

Tim Duy posted a graph of various rules to determine the base nominal interest of the Federal Reserve. Here is the graph that he posted. (link)

EMPd090414

The graph includes versions of the Taylor rule and the modified Taylor rule used by Glenn Rudebusch at the Federal Reserve Bank of San Francisco.

Now I will overlay my effective demand rule (orange line) on top of his graph. (link to equation)

The effective demand rule tracks a similar path to the other rules. The other rules use the output gap (Taylor) and the unemployment gap (Rudebusch). The ED rule compares the composite utilization of labor and capital (TFUR) against the effective labor share.

Currently, the Rudebusch rule is giving the same Fed rate as my Effective Demand rule.

Posted by Edward Lambert on 09/04/2014 in Monetary policy | Permalink

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Synopsis of Effective Demand

Data as of 3rdQ-2018
Effective Demand = $18.433 trillion
Real GDP = $18.671 trillion
Productive Capacity = $24.872 trillion
UT index is at effective demand limit = -0.92%
Effective demand limit = 74.1%
TFUR = 75.1%
ED Fed rate rule = 4.0%
Estimated Natural Real Interest rate = 2.3%
Short-term real interest rate = 2.8%

There is no recession for 3rdQ-2018. Chance of recession is growing as economy has now reached 2nd effective demand limit in this business cycle. I am forecasting that economic conditions will begin to contract in the second half of 2018.

Click on Graphs below to see updated data at FRED.

UT Index (measure of slack):