Graph 3. Taylor Rule: One simple way to evaluate the stance of monetary policy (tight or loose) is to compare the current Federal Funds Rate with the one prescribed by the Taylor Rule, which is Taylor FFR=2.07+1.28xInflation - 1.95x(Unemployment rate - Natural Unemployment rate). Lets build it in one chart from the year 2000. HINT: this is complicated, so follow the directions closely. a. First, plot Personal Consumption Expenditures Excluding Food and Energy (PCEPILFE), Units= Compounded Annual Rate of Change. b. Next, plot Taylor Rule FFR. To do that, go to Edit Graph, i. Under Edit lines tab find Customize data and type Unemployment Rate (UNRATE) press Add, check that Units=Percent. ii. Further down, under Customize data type Noncyclical Rate of Unemployment (NROU) press Add, make sure that Units=Percent. iii. Finally, in the Formula box just below, enter: 2.07+1.28*a-1.95*(b-c). and click apply (See the edits lines menu on the picture).

c. To compare the Taylor Rule FFR with the current FFR, go to Edit Graph, then Add Line tab: Effective Federal Funds Rate (EFFR). d. NOTE: Your resulting graph should have two lines (see the left section on the picture): i. The one constructed using Taylor Rule will have a long name in the legend 2.07+1.28*Personal Consumption Expenditure Excluding Feed and Energy (Chain-Type Price Index)-1.95*(Unemployment Rate-Noncyclical Rate of Unemployment). ii. The other being the Effective FFR. 7. Graph 3 analysis (3-4 sentences): a. During what periods was monetary policy more or less consistent with what is prescribed by the Taylor Rule? What about the periods when FFR is bound at the zero lower bound (ZLB)? b. In the most recent two quarters, are the two rates consistent? Why or why not?