Taylor-Type Rule
We use the Taylor-type rule to evaluate the current policy rate in the United States. In specific, we follow Bullard (2023) and consider the rules of the following form: $$R_t = \max\left[R^* + \pi^* + \phi_{\pi}(\pi_t-\pi^*) + \min(ygap_t,0),0\right],$$
- $R_t$ is the recommended policy rate
- $R^*$ is the real interest rate
- $\pi^* = 2%$ is the inflation target
- $\pi_t$ is the inflation index
- $\phi_{\pi}$ describes the reaction of the policy maker to deviations of inflation from target
- $ygap_t$ is the output gap
Inflation
Output Gap
We use Okun’s law to compute the output gap.
The Sufficiently Restrictive Zone
References
- Bullard, J. (2023). Is Monetary Policy Sufficiently Restrictive?. The Regional Economist.
- Holston, K., Laubach, T., & Williams, J. C. (2023). Measuring the natural rate of interest after COVID-19 (No. 1063). Staff Report.