3. Predicting the fed funds rate (a FRED question):

Consider the following simplemonetary policy rule:Rt r = m 1t 2 + n Y~t.

In the following questions, you are asked to gather data on inflation andshort-run output to feed into this policy rule. A good resource for the datayou will need is the FRED database of the St. Louis Fed, available at http://research.stlouisfed.org/fred2/.

(a) Pick some reasonable values for the parameters of this policy rule, andexplain why you chose these values.

(b) Obtain data on the inflation rate using the FRED series "JCXFE" for themost recent 12-month period possible. Explain this particular measure ofinflation and comment on its most recent value.

(c) make an estimate of Y~t for the U.S. economy. Explain how to constructthis estimate, and discuss its value. You may find it helpful to use the seriesGDPPOT from the FRED database.

(d) Use these data and the monetary policy rule you specified above to seewhat fed funds rate the policy rule indicates. How does this compare tothe current fed funds rate? (Hint: Be sure that you are comparing twonominal rates; the simple rule above only gives you the real portion.)

(e) If the rates are different, why do you think that is the case? What wouldyou recommend to the Fed, based on your calculation?