Suppose Bangladesh Bank (BB) decided to follow the Taylor rule to conduct monetary policy. BB's target interest rate is the lending rate. The economists in BB understands that there will be some time lag for their policy to be effective and therefore they use a forecasted or expected inflation rate (instead of current inflation rate) in their policy rule. BB is equally concerned about output and inflation. According to BB's estimate the equilibrium real lending rate is 5 percent. BB's inflation target is 3 percent and the deviation of actual output from the potential output (as measured by the HP filter) is 1 percent. a. If the expected inflation rate is 6%, then at what target should the lending rate be set according to the Taylor rule?
Suppose Bangladesh Bank (BB) decided to follow the Taylor rule to conduct
a. If the expected inflation rate is 6%, then at what target should the lending rate be set according to the Taylor rule?
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