The Mankiw Rule is a monetary policy rule developed by economist Greg Mankiw. It is designed to provide a recommendation for how a central bank should set short-term interest rates. It is similar to the more well-known Taylor Rule in terms of results, but the inputs are slightly different. Whereas, the primary inputs for the Taylor Rule formula are CPI inflation and the output/inflationary gap; the primary inputs for the Mankiw Rule are core CPI inflation and unemployment.
For our formulation of the Alternative Mankiw Rule, we used our own Alternative core CPI measure, as opposed to the official core CPI. This change results in significantly different results for the monetary policy rule in certain eras, particularly during the ’00s housing boom and subsequent bust.
We believe that the Alternative Mankiw Rule provides a better framework for monetary policy since it factors in housing prices, whereas the traditional Mankiw Rule does not. While there are still some flaws in this methodology or in any methodology for that matter, this alternative monetary rule can be used to make better and more informed monetary policy decisions. For investors, it should provide a clearer picture as to whether monetary policy could result in negative consequences.