A. Consider the Taylor rule: rt = (s1)[rt−1] + (s2)[r n + ayY˜ + aπ(πt − π T )]. Assume target inflation at 2% and natur
Posted: Fri Jul 01, 2022 8:12 am
A. Consider the Taylor rule: rt = (s1)[rt−1] + (s2)[r n + ayY˜ +aπ(πt − π T )]. Assume target inflation at 2% and natural rate ofinterest at 1.8%. (a) If output gap increase by 1.5% and actualinflation to 4%, how much will be the interest rate increase from2% if the central bank gives twice more weight to output gap ascompared to inflation targeting weight of 0.5? Assume s1 = s2 =0.5. [Write the Taylor rule first and then compute.
B. Which component of this Taylor rule captures smoothnessof interest rate changes? and How?
B. Which component of this Taylor rule captures smoothnessof interest rate changes? and How?