US EditionFrom Leader to Follower: How the Federal Funds Rate Lost Its Causal Power
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From Leader to Follower: How the Federal Funds Rate Lost Its Causal Power
For years, I’ve argued that central banks fundamentally misunderstand their own monetary policy transmission mechanism. They believe the federal funds rate drives nominal variables, when increasingly it’s the other way around. In this blog post, I present strong empirical evidence through a structural VAR analysis spanning 1973 to 2025 that demonstrates this complete reversal of causality. The results in my view are nothing short of remarkable. …
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