Monday, May 25, 2009

Graphical Calcultor for the Taylor Rule

I understand the Taylor Rule, established by John Taylor, though apologies to him for not yet readig his paper. I have a handy graphical system for calculating the proper short term interest rate using real data from my master calculator. This site has the S&P charted over time, and the Treasury yield curve at any point in time is constructed. I use the S&P as a proxy for real output of the economy, the Treasury Yield curve shape as a proxy for stability (zero inflation).

I move the pointer to a point in time in which the S&P is relatively stable between booms and busts, and not ethe shape of the yield curve. The stable period is one without rapid growth and the short term variation in S&P is relatively small.

Then I move the pointer to the current time and compare the yield curve shape to its shape during the stable period. I estimate the change on the short end of the yield curve to restore its stable shape.

I do a lot of playing with that yield curve, noting changes to it and the S&P during various information shocks, Treasury auctions, and the like.

My graphical computation and John Taylor's estimation for the current setting of short term rates seem to agree, though I have no confidence that my use of this graphical system was not influenced by John Taylor's announcement recently that he think short term rates should be raised a smidgen.

My Current activities:

I have selected a general approach to computing the particulas of our Quantum Mechanical economy. I am looking and playing with a multi-good, multi-stage queueing problem under conditions of coherence and constant measurement uncertainty. I will report back soon, hopefully, with the single QM equations that matches pricing theory, credit theory, and inventory management; at least to a first order estimate of the finite eigen values. I should also be able to establish the specific finite number and position of the term points on the yield curve that we humans rely on.

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