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Reference no. 214-062-4
Authors: Georg Stadtmann (European University Viadrina); Adrian Stoller (University of Southern Denmark); Carsten Croonenbroeck (European University Viadrina)
Published in: 2014

Abstract

This supplement is to accompany the case. Peter was enrolled in his second macroeconomics course at the university and was glad that he finally understood the basic principles: An expansionary monetary policy is used in a recession. The basic idea is to lower the interest rate to stabilise aggregate demand. However, in a boom, when the economy is running at the capacity constraint, the interest rate has to be increased to reduce the inflationary pressure. As a consequence, it became clear to Peter that the output gap (ie the difference between the current and potential output) as well as the inflation rate are important macroeconomic indicators. Peter ran into an article, written by Taylor (1993), which highlights the advantages of simple monetary policy rules as a decision tool for central banks. Peter wanted to find out whether he was able to replicate the main results of Taylors study. Especially, he wanted to simulate the path of the Taylor interest rate in order to compare it to the actual interest rate setting of the Federal Reserve.
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Abstract

This supplement is to accompany the case. Peter was enrolled in his second macroeconomics course at the university and was glad that he finally understood the basic principles: An expansionary monetary policy is used in a recession. The basic idea is to lower the interest rate to stabilise aggregate demand. However, in a boom, when the economy is running at the capacity constraint, the interest rate has to be increased to reduce the inflationary pressure. As a consequence, it became clear to Peter that the output gap (ie the difference between the current and potential output) as well as the inflation rate are important macroeconomic indicators. Peter ran into an article, written by Taylor (1993), which highlights the advantages of simple monetary policy rules as a decision tool for central banks. Peter wanted to find out whether he was able to replicate the main results of Taylors study. Especially, he wanted to simulate the path of the Taylor interest rate in order to compare it to the actual interest rate setting of the Federal Reserve.

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