Taylor Rules and the Fed
How can a rule predict the impossible, negative interest rates? Notice the flat line in red? That is the Fed setting overnight interest rates to zero.
What is the problem with Taylor rules? There was a change in dimensionality after the crash, regime change. I went through this a year ago, modeling the yield curve as a Shannon channel. There is less to flow after the crash, that is why we crash. Fewer bankers in the chain, the Fed has to move up the chain and work the two or five year trades.
Why doesn't the Fed just announce this, the ECB figured it out? Because the Fed needs to maintain the fiction that Congress has traction, it doesn't. It is the law, Ben is required to lie to us.
When the current production produces less margin, the economy will shorten supply lines, reduce specialization, and start with a reduced rank distribution.
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