Continuing to work with a 2% inflation target, a 1999 version of the Taylor Rule and an initial nominal policy rate of 1.5%, now consider the impact of including a variable risk premium that is typically positive, meaning that the market interest rate is usually above the central bank policy rate. In the following questions, assume the normal (natural) risk premium is 100bp, the economy has a negative output gap (minus 1%), the actual risk premium is 300bp, the economy's natural real market interest rate is 2% and that both actual and expected inflation is 1%.

Continuing to work with a 2% inflation target, a 1999 version of the Taylor Rule and an initial nominal policy rate of 1.5%, now consider the impact of including a variable risk premium that is typically positive, meaning that the market interest rate is usually above the central bank policy rate. In the following questions, assume the normal (natural) risk premium is 100bp, the economy has a negative output gap (minus 1%), the actual risk premium is 300bp, the economy's natural real market interest rate is 2% and that both actual and expected inflation is 1%.

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter15: Macroeconomic Policy, Economic Stability, And The Federal Debt

Section: Chapter Questions

Problem 6CQ

See similar textbooks

Similar questions

Continuing to work with a 2% inflation target, a 1999 version of the Taylor Rule and an initial nominal policy rate of 1.5%, now consider the impact of including a variable risk premium that is typically positive, meaning that the market interest rate is usually above the central bank policy rate. In the following questions, assume the normal (natural) risk premium is 100bp, the economy has a negative output gap (minus 1%), the actual risk premium is 300bp, the economy’s natural real market interest rate is 2% and that both actual and expected inflation is 1%. 5a) what nominal policy rate would you recommend? 5b) what is the natural nominal policy interest rate? 5c) how does the new market real interest rate compare with its initial level? 5d) what nominal policy rate would the Taylor Rule recommend if the negative output gap then widened to minus 2% and both current and expected inflation fell to zero? (other factors, including the risk premium remaining unchanged)
Given the Taylor rule equation below, what should the current Federal Reserve target value be for the fed funds rate (i_ff)? You will need to look up on FRED: 1) current inflation rate, p, and 2) current GDP growth rate, y; you should also assume that: 1) the current real rate of interest, r, is 0.15% (that is, 15/100 of a percent; almost zero!); the targeted inflation rate, p*, is 2%; and the targeted GDP growth rate, y*, is 2.75%
Suppose that the next FOMC meeting is coming up in a few days and the official inflation and output gap numbers have just been released. The current federal funds rate is 1.25%, the long-term fed funds rate target is 3.25%, and the inflation rate target is 2%. According to the release, inflation is currently at 1.25 percent and the output gap is -0.5 percentage points. Given the information above, the expected federal funds rate is _____ percent.
What does the Taylor rule imply that policymakers shoulddo to the fed funds rate under the following scenarios?a. Unemployment rises due to a recession.b. An oil price shock causes the inflation rate to rise by1% and output to fall by 1%.c. The economy experiences prolonged increases inproductivity growth while actual output growth isunchanged.d. Potential output declines while actual output remainsunchanged.e. The Fed revises its (implicit) inflation target downward.f. The equilibrium real fed funds rate decreases.
A) Using the original Taylor Rule where the equilibrium real rate of interest is estimated to be 2% and the target inflation rate is 2%, what is the federal funds rate implied by the Taylor Rule? b) Using the Mankiw Rule, what is the federal funds rate implied by the Mankiw Rule? c) According to the Taylor Rule, was the Fed being hawkish or dovish during this period? Explain and be specific with numbers. d) Relate your answer in part c) to the work done by Kydland and Prescott. e) Draw a reserve market diagram (reserve supply and reserve demand) locating the point associated with the actual federal funds rate on 1976-04-01 as point A. We don't know what value reserve supply is so just label as RS. Now assuming a stable reserve demand curve, explain and show what the Fed would have had to do to obtain the federal funds rate implied by the Taylor rule. Label this point as point B.
Using the Taylor Rule, find the appropriate Federal Funds rate (FFR). Assume that the Fed has target inflation rate of 2% and a target GDP growth rate of 3%. What FFR should the Fed target if the current inflation is 5% and the growth rate is 4%?
Suppose for a moment that Jerome Powell as called on you for advice. Calculate the target FED Funds rate using the Taylor rule where the PCE price index is 4.4%, the real FED funds rate is -3.2%, and the annual growth rate is estimated at 4.9% in conjunction with the FED’s inflation and growth targets. Employing the estimated target rate, carefully outline the advice you would offer to Mr. Powell on current monetary policy given that the FED funds target is near zero.
Can you please help with the explanation of the below? In contemporary monetary theory, we do not normally think of using a money stock to implement monetary policy. By setting m-p, the log of the real money stock, equal to money demand y-b.i where y and i are ln(GDP) and the interest rate, create a money policy reaction function. Noting that p+y is the log of nominal GDP how could you interpret m in this case so as to make your equation approximate the reality in Australia?
H8. In order to gauge π^e , the rational expectation model predict the next period π ^e equals to ___________ inflation level . A. the current π B. short run equilibrium C. long run equilibrium D. yield of regular bond - yield of tips bond In order to gauge π^e , by applying the (rearranged) Fisher equation π^e = i − r, the predicted π^e equals to ______ inflation level. A. the current π B. short run equilibrium C. long run equilibrium D. yield of regular bond - yield of tips bond Which of the following characteristics of Phillips curve lead to a faster convergence from short run equilibrium to long run equilibrium. A. small ω B. large ω C. adapted π e forming mechanism D. rational π e forming mechanism Let us consider the following economic shock. The geopolitical conflict between Russia and Ukraine raised the oil/food prices, people expect higher inflation in the future. Thus π^e change to π ^e′ . The Phillips curve will shift _________(ABC) by __________(DEFG) amount .…
"Consider an economy experiencing stagflation, characterized by high unemployment and high inflation. Traditional monetary policy suggests that addressing inflation often leads to higher unemployment, and vice versa. In this context, critically evaluate the effectiveness of non-traditional monetary policy tools such as quantitative easing (QE) and negative interest rates. Discuss how these tools can be used to address stagflation, considering their potential impacts on both inflation and unemployment. Additionally, analyze the risks and limitations of these tools in the context of potential long-term economic repercussions, such as asset bubbles and distorted credit markets." Don't use chatgpt or other ai tool If you gave wrong answer and ai answer I will give you dislike.
Consider the following expressions: π = πe + ε(un − u) (1) L(u,π) = a(u − un) + π2 (2)1) Assign a label to expression (1) and (2) and interpret them in detail.2) Utilizing expression (1) and (2) find the optimal level of inflation under discretionary monetary policy outlook. Also interpret the derived value.
Suppose that actual inflation is 2.5 percent, the Fed's inflation target is 2 percentage points, and unemployment rate is 2.5 (which is 1.5 percent below the Fed's full-employment target of 4 percent). According to the Taylor Rule, what value will the Fed want to set for its targeted interest rate?