The text provides an illustration of Taylor interest rate rule first proposed in the early 1990s as an automatic way to conduct monetary policy. One version of this rule (for 1988 – 2008 data) is: Federal Funds Rate = 2.07 + 1.28 x (inflation rate) – 1.95 x (unemployment gap) For 2020, use an inflation rate of 2% and the unemployment gap is the difference between current unemployment (6.9%) and the natural rate of unemployment (UN) = 4.5%. (1) What is the current value of the Federal funds rate? (2) What does the Taylor Rule predict? (3) Is there a Phillips Curve relationship in the Taylor Rule? Explain by assuming a fixed federal funds interest rate of 5% and then double the rate of inflation (this is not a numerical calculation problem).
The text provides an illustration of Taylor interest rate rule first proposed in the early 1990s as an automatic way to conduct
Federal Funds Rate = 2.07 + 1.28 x (inflation rate) – 1.95 x (
For 2020, use an inflation rate of 2% and the unemployment gap is the difference between current unemployment (6.9%) and the natural rate of unemployment (UN) = 4.5%.
(1) What is the current value of the Federal funds rate?
(2) What does the Taylor Rule predict?
(3) Is there a
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