That said, widespread credit constraints presumably reduce the number of players who can take advantage of lower rates. So the IS curve, while still downward-sloping, is probably steeper than normal, a point Mark Thoma has made.
Wiki says:
For the IS curve, the independent variable is the interest rate and the dependent variable is the level of income (even though the interest rate is plotted vertically). The IS curve is drawn as downward-sloping with the interest rate (i) on the vertical axis and GDP (gross domestic product: Y) on the horizontal axis.
The short term economic yield is not independent, whoever got that idea?
The Treasury yield curve is the closest thing we have to an semi-orthogonal representation of the growth in Federal Government goods and services, from the short to the long end. It is a compacted view of federal goods flowing through the channel. That is something that is far from an independent variable. Most of the time the fed is not setting that short end, it is trying to catch up to it.
What is the real definition of Zero Bound? It is the result that happens when, over 20 years, Congress loses its credibility on delivering Pareto efficient transaction. Any move that Congress makes will harm one region more than it helps any other. In channel theory, that means that more accurate changes in inventory flow in regional government is Pareto Efficient. Or, more plainly, the government channel wants medium sized goods delivered at medium rates by regional government, to bridge the gap. The problem is, we don't have regional governments, the next step down are dysfunctional states.
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