The TC Rule for Monetary Policy [Updated]
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]
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 6/21/2011: I expand the idea behind the rule to include where to spend the money. Hint: Payroll tax Cuts!]
[Update: probably needs to be some adjustment for spending multipliers]
Update 4/17/2011: More extensive yet incomplete thoughts here.]