illustrative scenarios

mandatory_coverages

the 4 scenarios at the end to explain the impact on the hist real rate/infl targ and the hist nom rate, can someone walk through the logic of the increases/decreases/similar

Staff-T1

Scenario 1 - 2022YE Environment Constant Projection:

• A: When real rates are negative, you are adding a strictly negative number to a positive number (2%). Over time, your URFR will decrease as more negative observations are added to the EMA and positive rates start to drop out which is why the URFR decreases every year
• B: Just taking a LT average will eventually converge to the LT nominal rate of 3.34%

Scenario 2 - 4% LT nominal rate and 2% inflation

• A: When real rates are positive, you are adding a strictly positive number to a positive number (2%). Over time, your URFR will now increase as more positive observations are added to the EMA which replaces lower observations. This is why the URFR increases over time, the opposite of the above
• B: Just taking a LT average will eventually converge to the LT nominal rate of 4%

Scenario 3- Stagflation
There is no clear pattern with Stagflation. Stagflation means high interest rates and high CPI. The impact on A and B would vary depending on the relative difference between interest rates and CPI at each period

Scenario 4 - Deflation
This is similar to stagflation where we have low interest rates and low CPI. The relative impact of A and B again depends on the relative difference between interest rates and CPI at each period