Address whether the Fed and Alan Greenspan kept interest rates too low for too long following the 2001 recession according to two rules: The original Taylor Rule and the Mankiw Rule
Data Table and additional sub problems in the attached.
Use the table below to answer the following questions.
FF - the federal funds rate
PCE INF = PCE inflation
PCE CORE = the core rate of PCE inflation
GDP = real GDP
GDP POT = potential (real) GDP
UR = the unemployment rate
we are going to address whether the Fed and Alan Greenspan kept interest rates too low for too long following the 2001 recession according to two rules: The original Taylor Rule and the Mankiw Rule
Use the table below to answer the following questions.
FF - the federal funds rate
PCE INF = PCE inflation
PCE CORE = the core rate of PCE inflation
GDP = real GDP
GDP POT = potential (real) GDP
UR = the unemployment rate
Data Table for Question 3
|
DATES
|
FF
|
PCE INF
|
PCE CORE
|
GDP
|
GDP POT
|
UR
|
|
2002-04-01
|
1.75
|
1.1
|
1.7
|
12894.7
|
13052.8
|
5.8
|
|
2002-07-01
|
1.74
|
1.5
|
1.9
|
12956.7
|
13161.2
|
5.7
|
|
2002-10-01
|
1.44
|
1.9
|
1.7
|
12962.9
|
13267.4
|
5.9
|
|
2003-01-01
|
1.25
|
2.5
|
1.7
|
13028.6
|
13371.3
|
5.9
|
|
2003-04-01
|
1.25
|
1.8
|
1.5
|
13151.8
|
13470.6
|
6.1
|
|
2003-07-01
|
1.02
|
1.9
|
1.4
|
13374.0
|
13566.8
|
6.1
|
|
2003-10-01
|
1.00
|
1.8
|
1.4
|
13525.7
|
13659.8
|
5.8
|
|
2004-01-01
|
1.00
|
1.9
|
1.7
|
13606.6
|
13748.2
|
5.7
|
|
2004-04-01
|
1.01
|
2.5
|
1.9
|
13710.7
|
13833.5
|
5.6
|
|
2004-07-01
|
1.43
|
2.5
|
2.0
|
13831.0
|
13916.8
|
5.4
|
|
2004-10-01
|
1.95
|
2.9
|
2.1
|
13947.7
|
13999.2
|
5.4
|
|
2005-01-01
|
2.47
|
2.6
|
2.2
|
14100.2
|
14082.6
|
5.3
|
|
2005-04-01
|
2.94
|
2.6
|
2.1
|
14177.2
|
14165.8
|
5.1
|
|
2005-07-01
|
3.46
|
3.1
|
2.1
|
14292.9
|
14249.3
|
5.0
|
|
2005-10-01
|
3.98
|
3.1
|
2.3
|
14372.0
|
14333.2
|
5.0
|
|
2006-01-01
|
4.46
|
3.0
|
2.1
|
14546.4
|
14418.5
|
4.7
|
|
2006-04-01
|
4.91
|
3.1
|
2.3
|
14591.6
|
14504.9
|
4.6
|
|
2006-07-01
|
5.25
|
2.8
|
2.4
|
14604.4
|
14592.0
|
4.6
|
|
2006-10-01
|
5.25
|
1.8
|
2.2
|
14718.4
|
14679.8
|
4.4
|
|
2007-01-01
|
5.26
|
2.3
|
2.4
|
14728.1
|
14768.3
|
4.5
|
|
2007-04-01
|
5.25
|
2.3
|
2.0
|
14841.5
|
14859.1
|
4.5
|
|
2007-07-01
|
5.07
|
2.1
|
2.0
|
14941.5
|
14949.5
|
4.7
|
|
2007-10-01
|
4.50
|
3.3
|
2.2
|
14996.1
|
15038.7
|
4.8
|
|
|
|
|
|
|
|
|
We are using data from 2004-04-01 to answer parts a), b), and c).
a) Using the original Taylor Rule where the equilibrium real rate of interest is estimated to be 2% and the target inflation rate is 2%, what is the federal funds rate implied by the Taylor Rule?
b) Using the Mankiw Rule, what is the federal funds rate implied by the Mankiw Rule?
c) According to the Taylor Rule, was the Fed being hawkish or dovish during this period? Explain and be specific with numbers.
d) Let's fast forward 3 years to 2007-04-01. Using the original Taylor Rule where the equilibrium real rate of interest is estimated to be 2% and the target inflation rate is 2%, what is the federal funds rate implied by the Taylor Rule?
e) According to the Taylor Rule, was the Fed being hawkish or dovish during this period? Explain and be specific with numbers.