Naming this Blog

This Blog's name is a reference to the Fed's zero interest rate policy (ZIRP). The Fed entered the era of ZIRP in December 2008 when it lowered the short-term interest rate to effectively zero. Current economic conditions suggest the interest rate should be negative: The supply of savings ("loanable funds") is greater than demand for savings. For practical reasons the Fed cannot lend out funds at a negative rate. Monetary policy loses its effectiveness.

What do I mean when I say that current economic conditions suggest a negative interest rate? I am referring to the Taylor rule. The Taylor rule is a simple response function which suggests that the Fed raise or lower its interest rate according to changes in inflation and level of unemployment. The model currently suggests an interest rate of about minus 5.25%.

The model has performed well: Below is the predicted interest rate based on the Taylor rule (blue line) and the actual interest rate at the time (white line):

Note: I am aware that John Taylor himself prefers a different version of his rule. I don't find his arguments particularly convincing and agree with Brad DeLong