Question

In this question we are going to address whether the Fed and Alan Greenspan kept interest rates too low for too long following the 2001 recession according to two rules: The original Taylor Rule and the Mankiw Rule

Use the table below to answer the following questions.

FF - the federal funds rate

PCE INF = PCE inflation

PCE CORE = the core rate of PCE inflation

GDP = real GDP

GDP POT = potential (real) GDP

UR = the unemployment rate

Date	FF	PCE INF	PCE Core	GDP	GDP POT	UR
2003-07-01	1.02	1.9	1.4	13374	13566.8	6.1
2006-07-01	5.25	2.8	2.4	14604.4	14592	4.6

We are using data from 2003-07-01 to answer parts a), b), and c).

a) (5 points) 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) (5 points) Using the Mankiw Rule, what is the federal funds rate implied by the Mankiw Rule?

c) (5 points) According to the Taylor Rule, was the Fed being hawkish or dovish during this period? Explain and be specific with numbers.

d) (5 points) Let's fast forward 3 years to 2006-07-01. 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?

e) (5 points) According to the Taylor Rule, was the Fed being hawkish or dovish during this period? Explain and be specific with numbers.  

Answer 1