Question

Please Answer in detail. Go to the St. Louis Federal Reserve FRED database, and find data...

Please Answer in detail.

Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), real GDP (GDPC1), an estimate of potential GDP (GDPPOT), and the federal funds rate (DFF).

For the price index, adjust the units setting to “Percent Change From Year Ago” to convert the data to the inflation rate;

For the federal funds rate, change the frequency setting to “Quarterly.”

Download the data into a spreadsheet.

Assuming the inflation target is 2%, calculate the inflation gap and the output gap for each quarter, from 2000 until the most recent quarter of data available.

Calculate the output gap as the percentage deviation of output from the potential level of output.

QUESTION(s)

a. Use the output and inflation gaps to calculate, for each quarter, the fed funds rate predicted by the Taylor Rule. Assume that the weights on inflation stabilization and output stabilization are both 1⁄2. Compare the current (quarterly average) federal funds rate to the federal funds rate prescribed by the Taylor Rule. Does the Taylor rule accurately predict the current rate? Briefly comment.

b. Create a graph that compares the predicted Taylor Rule values with the actual quarterly federal funds rate averages. How well, does the Taylor Rule prediction fit the average federal funds rate? Briefly explain.

c. Based on the results from the 2008–2009 period, explain the limitations of the Taylor Rule as a formal policy tool. How do these limitations help explain the use of nonconventional monetary policy during this period?

d. Suppose Congress changes the Fed’s mandate to a hierarchical one in which inflation stabilization takes priority over output stabilization. In this context, recalculate the predicted Taylor rule value for each quarter since 2000, assuming that the weight on inflation stabilization is 3⁄4 and the weight on output stabilization is 1⁄4. Create a graph showing the Taylor Rule prediction calculated in part (a), the prediction using new “hierarchical” Taylor Rule, and the fed funds rate. How, if at all, does changing the mandate change the predicted policy paths? How would the fed funds rate be affected by a hierarchical mandate? Briefly explain.

Homework Answers

Answer #1

solution-

For the most recent period in 2013:Q1, the federal funds rate is 0.14%, while the Taylor Rule predicts a slightly negative –0.07%, represe nting a gap of 0.21%. Compared to other significant deviations, this seems to be a fairly close correspondence, although the negative value is not possible in practice.

The Taylor rule since 2000 has periods in which they are fairly closely correlated, particularly from 2000 to 2002. However, there are significant gaps in other times, or periods in which they do not seem to move together, such as the period from 2002 to 2006. From 2008 onward, there are significant differences between the two, particularly the period late in 2008 through 2010

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Question 1 The Federal Reserve considers ideal inflation rate to be a. 0% b. 1% c....
Question 1 The Federal Reserve considers ideal inflation rate to be a. 0% b. 1% c. 2% d. 3% e. dependent on current unemployment rate Question 2 The dual mandate given to the Federal Reserve by the Congress in 1978 means that the two goals the Fed focuses on are a. low employment and low inflation b. low employment and low output c. low unemployment and high output d. low unemployment and low inflation Question 3 Okun's Law relates a....
Economists at the Federal Reserve estimate that in the next quarter the output will grow further...
Economists at the Federal Reserve estimate that in the next quarter the output will grow further above the full-employment level and inflation is likely to accelerate from 3% to 4.1%. Based on the Taylor Rule, what recommendation should the economists give to the Fed governor? Increase the fed funds rate, regardless of the size of the deviation of output from the full employment level Increase the fed funds rate, but only if the deviation of output from the full employment...
1. The Fed’s maximum employment mandate is generally interpreted as an attempt to achieve an unemployment...
1. The Fed’s maximum employment mandate is generally interpreted as an attempt to achieve an unemployment rate that is as close as possible to the natural rate and inflation that is close to its 2% goal for personal consumption expenditure price inflation. Go to the St. Louis Federal Reserve FRED database and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and a measure of the natural rate of unemployment (NROU). For the price index,...
The Federal Reserve Bank of St. Louis offers a wide range of economic data at its...
The Federal Reserve Bank of St. Louis offers a wide range of economic data at its Web site, called FRED (fred.stlouisfed.org/) including data for Japan. We can use these data to compare the behavior of real GDP per capita and inflation in Japan and Canada. a. Download annual data on real GDP per capita in Japan (JPNRGDPC) and for Canada (CANRGDPC) from 1960 to 2011. Chart the two data series on the same graph. How does real GDP per capita...
Consider the following data for the U.S. economy:  consumer price index (percentage change from year...
Consider the following data for the U.S. economy:  consumer price index (percentage change from year ago) = 1.2  real GDP (billion dollars) = 14,542  real potential GDP (billion dollars) = 15,372  long term real interest rate (percent) = 2.0  inflation target (percent) = 2.0 Using the data, find the nominal short term rate that would be predicted by the Taylor Rule. Assume that the weights on inflation and output stabilization are both equal to 0.5.
One convenient source of up-to-date U.S. macroeconomic data is the Federal Reserve Bank of St. Louis....
One convenient source of up-to-date U.S. macroeconomic data is the Federal Reserve Bank of St. Louis. It has a monthly publication, National Economic Trends, which summarizes these data. One important graph that this publication always presents in front (either page 4 or 5) is one on the movements of Real GDP, as shown below. Study the graph and its title carefully; note that it shows the annual %-change in U.S. Real GDP (GDP measures total production). Focus on the portions...
1. The Federal Reserve Act says that the Fed must try to achieve​ ______. A. a...
1. The Federal Reserve Act says that the Fed must try to achieve​ ______. A. a balanced budget B. maximum​ employment, stable​ prices, and moderate​ long-term interest rates C. a stable U.S. dollar on foreign exchange markets and moderate​ long-term and​ short-term interest rates D. an economic environment in which investment in U.S. stock and money markets is encouraged The Federal Reserve Act says that the Fed must use​ ______ to achieve its objectives. A. bank reserves B. commercial banks...
The main advantage of using the interest rate, rather than the money supply, as the policy...
The main advantage of using the interest rate, rather than the money supply, as the policy instrument in the dynamic AD–AS model is that it is more realistic. Today, most central banks, including the Federal Reserve, set a short-term target for the nominal interest rate. Keep in mind, though, that hitting that target requires adjustments in the money supply. For this model, we do not need to specify the equilibrium condition for the money market, but we should remember that...
The main advantage of using the interest rate, rather than the money supply, as the policy...
The main advantage of using the interest rate, rather than the money supply, as the policy instrument in the dynamic AD–AS model is that it is more realistic. Today, most central banks, including the Federal Reserve, set a short-term target for the nominal interest rate. Keep in mind, though, that hitting that target requires adjustments in the money supply. For this model, we do not need to specify the equilibrium condition for the money market, but we should remember that...
2. This question refers to the article: Fed raises interest rates, signals 2 more hikes in...
2. This question refers to the article: Fed raises interest rates, signals 2 more hikes in 2018 Akin Oyedele Mar. 21, 2018, 2:00 PM 16,032     The Federal Reserve announced Wednesday that it raised its benchmark interest rate by 25 basis points, to a range of 1.50% to 1.75%.     Over the next few weeks, this increase will affect credit cards, adjustable-rate mortgages, car loans, and other credit lines that don't have fixed rates.     The Fed still expects to...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT
Active Questions
  • Decide whether the normal sampling distribution can be used. If it can be​ used, test the...
    asked 1 minute ago
  • For this problem, carry at least four digits after the decimal in your calculations. Answers may...
    asked 2 minutes ago
  • MEASURING ECONOMIC PERFORMANCE: A) The expenditure approach; B) The Income Approach; C) Problems with GDP as...
    asked 9 minutes ago
  • A square gate is used to prevent seawater (density = 1027 kg/m^3) intrusion into a sewer...
    asked 16 minutes ago
  • Show that sequence {sn} converges if it is monotone and has a convergent subsequence.
    asked 27 minutes ago
  • Raner, Harris & Chan is a consulting firm that specializes in information systems for medical and...
    asked 28 minutes ago
  • 4.___________________ are for-profit organizations that contract out or lease a wide range of light manufacturing, warehousing,...
    asked 31 minutes ago
  • A simple random sample of size n is drawn. The sample​ mean, x overbar​, is found...
    asked 1 hour ago
  • Write C++ code to: Create a function called “ReadFile” that: Accepts a filename as input Opens...
    asked 1 hour ago
  • explain how media effects or influences our behavior in a relationship/ family structure OR how behavioral...
    asked 1 hour ago
  • Consider the following schema: Distributor (d-id: numeric, d-name: varchar, address: varchar) Item (i-id: numeric, i-name: varchar,...
    asked 1 hour ago
  • Dove's advertisement brainstormed marketers. We should be open minded. There are a lot embedded concepts for...
    asked 1 hour ago