Plot the Taylor Rule since 1990 on a quarterly basis (similar to Figure 18.9). For the output gap, use the percent deviations of real GDP (FRED code: GDPC1) from potential output (FRED code: GDPPOT). For inflation, use the percent change from a year ago of the price index for personal consumption expenditures (FRED code: PCEPI). Assume that the long-run risk-free rate averages 2 percent and the target inflation rate is 2 percent. When complete, compare the Taylor Rule rate against the actual federal funds rate (FRED code: FEDFUNDS) after 2007.
Answer to relevant QuestionsInflation 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 ...Country A frequently experiences large business cycle swings. Under what conditions might it be appropriate for country A to dollarize? If the Federal Reserve decides to sterilize the foreign-exchange market intervention described in Problem, show the impact on the Fed’s balance sheet. What would the overall impact be on the monetary base? What would be ...Why might sterilized foreign-exchange market intervention have a greater impact on the exchange rate in times of financial stress than in times of normal market conditions?Explain why giving an independent central bank control over the quantity of money in the economy should reduce the occurrences of periods of extremely high inflation, especially in developing economies.
Post your question