Mini-Case 1- Setting the FFR Target

Mini-Case 1- Setting the FFR Target - Targety= 0.08...

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Okun's Law Target y = c Target ∆U 0.08 0.03 2.5 -0.02 Taylor Rule Inflat. Gap GDP Gap FFR= π r ay (y-Y) 0.01 0.02 0.02 0.5 0 0.5 -0.06 0.02 0.02 a π ( - ) π π current  π Target  π
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Infl Gap Current y Target Y GDP Gap 0 0.03 0.08 -0.06
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Solution to Mini-Case 1 Part A Okun's Law Target y = Target ∆U) 0.063 0.03 2.2 -0.02 Taylor Rule Inflat. Gap GDP Gap FFR=  + π r+ (y-Y) 0.0249 0.02 0.02 0.45 0 0.55 -0.04 0.02 Current FFR= 0.03 Part B The weights the FOMC is placing on the Inflation  and the Output Gaps proposed in the original Taylor Rule equation would assign .50 or 50% of monetary policy to both Gaps.   In this case a weight of .45 or 45% is assigned to the Inflation Gap and a weight of .55 is assigned to the Output  Gap.  This is an indication that the FOMC is more concerned with setting the  the FFR to reduce the large, negative Output Gap than to reduce the small, positive Inflation Gap.   
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Mini-Case 1- Setting the FFR Target - Targety= 0.08...

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