Robert Parry

Certainly, globalization does mean that changes in foreign demand conditions matter more for U.S. aggregate demand. And global financial markets and cross-border capital flows quickly transmit pressures abroad to U.S. markets. But neither has had much effect on our ability to control domestic monetary policy. The reason is that there’s still a substantial “home bias” in our demand for goods, services, and assets—that is, the bulk of the goods and services we consume and the assets we hold are produced or issued in the U.S.

"Based on the core personal consumption price index, the historical equilibrium real funds rate averaged 2.67 percent from 1966 first quarter to 2003 fourth quarter,'' Parry said in an e-mail response to a question.

``Since the growth of productivity is running considerably higher than the average for that period, I assumed that a reasonable range for the equilibrium real rate would be 2.5 percent to 3.5 percent. I also assumed a reasonable estimate for inflation expectations would be a core PCE inflation rate of 1 percent to 2 percent.

``Therefore, the range for the nominal natural rate would be between 3.5 percent (2.5 percent real and 1 percent inflation) and 5.5 percent (3.5 percent real and 2 percent inflation)."

From a Bloomberg News column