A measure of real interest rates can be approximated by the Treasury Inflation-Indexed Security, or TIIS. Go to the St. Louis Federal Reserve FRED database, and find data on the five-year TIIS (FII5) and the personal consumption expenditure price index (PCECTPI), a measure of the price index. Choose "Quarterly" for the frequency setting of the TIIS, and download both data series. Convert the price index data to annualized inflation rates by taking the quarter-to-quarter percent change in the price index and multiplying it by 4. Be sure to multiply by 100 so that your results are percentages.
a. Calculate the average inflation rate and the average real interest rate over the most recent four quarters of data available, and the four quarters prior to that.
b. Calculate the change in the average inflation rate between the most recent annual period and the year prior. Then calculate the change in the average real interest rate over the same period.
c. Using your answers to part (b), compute the ratio of the change in the average real interest rate to the change in the average inflation rate. What does this ratio represent? Comment on how it relates to the Taylor principle.