Slide 0 Federal Reserve Policy David Papell University of Houston Economic Forecast Lunch April 23,...
10
slide 1 Federal Reserve Federal Reserve Policy Policy David Papell David Papell University of Houston University of Houston Economic Forecast Lunch Economic Forecast Lunch April 23, 2008 April 23, 2008
-
Upload
clarissa-caldwell -
Category
Documents
-
view
212 -
download
0
Transcript of Slide 0 Federal Reserve Policy David Papell University of Houston Economic Forecast Lunch April 23,...
slide 1
Federal Reserve Federal Reserve PolicyPolicyDavid PapellDavid Papell
University of HoustonUniversity of HoustonEconomic Forecast LunchEconomic Forecast Lunch
April 23, 2008April 23, 2008
slide 2
The Taylor RuleThe Taylor Rule
The Fed raises the nominal interest The Fed raises the nominal interest rate rate r r when real GDP is greater than when real GDP is greater than potential GDP and when inflation is potential GDP and when inflation is greater than the target inflation greater than the target inflation rate.rate.
where where r r is the short-term nominal is the short-term nominal interest rate set by the Fed (the federal interest rate set by the Fed (the federal funds rate)funds rate)
* *( ) (16.1)r Y R
slide 3
The Taylor RuleThe Taylor Rule
The Taylor rule is The Taylor rule is stabilizing. stabilizing.
When inflation rises above the target When inflation rises above the target inflation rate, the Fed raises the inflation rate, the Fed raises the nominal interest rate by more than nominal interest rate by more than inflation rises so that the real interest inflation rises so that the real interest rate rises.rate rises.
* *(1 ) (16.2)r Y R
slide 4
The Taylor Rule in PracticeThe Taylor Rule in Practice
slide 5
The Taylor Rule in PracticeThe Taylor Rule in Practice
slide 66
The Taylor Rule in PracticeThe Taylor Rule in PracticeE
uro
Are
a M
MR
U.S
. FF
R
Contemporaneous TR Forward-Looking TR
slide 7
Fed Policy in PracticeFed Policy in Practice
FFR was 5.25% from June 2006 to FFR was 5.25% from June 2006 to Sept 2007Sept 2007
Sept 18Sept 18 4.75%4.75% Oct 31Oct 31 4.50%4.50% Dec 11Dec 11 4.25%4.25% Jan 22Jan 22 3.50%3.50% Jan 30Jan 30 3.00%3.00% Mar 18Mar 18 2.25%2.25% April 29April 29
slide 8
Fed Policy in PracticeFed Policy in Practice
Is the Objective of the Fed to Is the Objective of the Fed to Eliminate Recessions?Eliminate Recessions?
Should the Objective of the Fed be Should the Objective of the Fed be to Eliminate Recessions?to Eliminate Recessions?
How Should the Fed RespondHow Should the Fed Respond When Output Falls?When Output Falls? When Inflation Rises?When Inflation Rises? When Output Falls and Inflation Rises?When Output Falls and Inflation Rises?
slide 9
The Taylor Rule and the The Taylor Rule and the DollarDollar
Suppose U.S. Inflation Rises Relative Suppose U.S. Inflation Rises Relative to Euro Area Inflationto Euro Area Inflation
Purchasing Power ParityPurchasing Power Parity Dollar Depreciates Against the EuroDollar Depreciates Against the Euro
Taylor RuleTaylor Rule Markets Expect the Fed to Raise the FFRMarkets Expect the Fed to Raise the FFR Dollar AppreciatesDollar Appreciates
Bad News About Inflation is Good Bad News About Inflation is Good News for the Exchange RateNews for the Exchange Rate
slide 10
The Taylor Rule and the The Taylor Rule and the DollarDollar
What Happened on April 10?What Happened on April 10? Euro Area Inflation Above TargetEuro Area Inflation Above Target ECB Kept Interest Rate at 4.00%ECB Kept Interest Rate at 4.00% Euro Hit New Record High Against the Euro Hit New Record High Against the
DollarDollar
