Question: Inflation is expected to rise when the Taylor Rule persistently
Inflation is expected to rise when the Taylor Rule persistently and significantly exceeds the federal funds rate. Conversely, inflation is expected to decline when the federal funds rate exceeds the rule. Using the same indicators as in Data Exploration Problem 1, plot since 1965 on a quarterly basis the gap between the Taylor rule and the federal funds rate, together with the inflation rate. Over long periods of time, does inflation rise when the Taylor Rule exceeds the federal funds rate? Does it fall when the federal funds rate exceeds the Taylor Rule?
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