Question

Calculate the value of the hypothetical federal funds rate in the first quarter (January - March) of 2019, which is implied by the Taylor rule.

Answer 1

Taylor rule is a general rule of thumb that is used by the central banks in predicting how the short-term interest rates will be move as a response to the changes in the economy.

where,

• Target Rate: Short-term interest rate after the change
• Neutral Rate: Current interest rate
• GDPe: Expected GDP Growth Rate
• GDPt: Long-Term GDP Growth Rate
• Ie: Expected Inflation Rate
• It: Target Inflation Rate

consider an economy with,

nuetral rate=7%

GDP growth is expected to be 8.5%.

long-term GDP growth rate of 3.5%

expected inflation rate is 2%.

inflation rate was at its target of 1.5%.

then,

%