Our monetary model consists of three equations, the Interest-Savings equation, the (Short Run) Phillips Curve, and an Interest Rate Rule,

y = A - ar I = n + K ( y- y") r= r* + 0, (y-y") + . (T-T?) where y = output, y"= 'efficient' output, /= real interest rate, = real interest rate associated with 'efficient' output, 7 = inflation, IT= expected inflation, 7= target inflation. For the rest of this question we will denote by yo the original value of y". pandemic. The following considers some challenges for a Central Bank in deciding monetary policy in the current We will call the long-run equilibrium values when yo is the efficient level of output the 'pre-pandemic' values. Assume that the pandemic decreases the 'efficient' output from Yo to a lower Y] (so y]