Nick Rowe brought the discussion back as did IMF Blanchard. Now the anonymous Economist weighs in.
As long as the Banker's Yield curve is above the noise, we are not Zero Bound. What happens in a deflation is that transaction rates slow down as the effective (meaning active) terms along the curve reduce in number. We don't hit zero, we just slow everything down.
If an economy has a central banker, then that banker is looking at the shortest end of the curve. What he sees are nominal dots on the curve, but these exist because we, at times, sell bonds at these term points. But they are not all effective, they are nominal markers, nothing else.
Right now, the shortest effective term is two years, that is the time it took for the retail sector to go through an inventory adjustment. The effective sample rate for the Fed is one year, twice the frequency of the shortest term. Economists suffer an illusion because the three month bond still is still has a point on the curve, but it is not effective. The response for the Fed is to target the one year bond for retail inventory growth of over two years of about 1.5%.
When the economy reflates, if ever, then the Fed can target the six month rate as the retail inventory cycle will go back to one year.
Bankers and their economists need to go back and find the JP Burg paper on maximum entropy spectral estimation. The problem is one of allocating precision to the steepest point of the curve, and taking precision away from the flat portion of the curve. To do this, they need to treat the lending channel as a Shannon channel, find its current channel rate, that determines the precision(number of terms) they have to work with. Then take the Central bank's portion of the short end, determined by sample rate and growth rates at that term. Set those two values and operate from there until it is time to change.
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