A measure of real interest rates can be approximated by the Treasury Inflation-Indexed Security, or TIIS. Go to the St. Louis Federal Reserve FRED database, and find data on the five year TIIS (FII5) and a measure of the price index, the personal consumption expenditure price index (PCECTPI). For the frequency setting for the TIIS, choose “quarterly,” and download both data series. Convert the price index values to annualized inflation rates by taking the quarter-to-quarter percent change in the price index and multiplying by four. Be sure to multiply by 100 so that the rate is in percentage terms.

a) Calculate the average inflation rate and the average real interest rate over the most recent four quarters available, and over the four quarters prior to that.

b) Calculate the change in the average inflation rate between the most recent annual period and the period prior to that. Do the same for the change in the average real interest rate for the two periods.

c) Using your answers to part (b), compute the ratio of the change in average real interest rate to the change in average inflation. What does this ratio represent?

Comment on how it relates to the Taylor principle.