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Part 1: Using the Taylor rule and the following information estimate short-term interest rate level to be used by the monetary policymakers. Also explain why
- Part 1: Using the Taylor rule and the following information estimate short-term interest rate level to be used by the monetary policymakers. Also explain why the monetary action suggested by the Taylor rule output may not be actually taken by the policymakers. Should the FED use Taylor rule now and what monetary policy actions this rule would suggest?
Measure | Long-run trend | Forecast |
GDP growth | 3.5% | 2.5% |
Inflation rate | 2.5% | 4% |
Short-term neutral rate | 2.5% | ? |
Part 2:
A. Discuss interest rate and reinvestment rate risk. How can bond portfolio manager use duration to manage interest rate risk? What is riding the yield curve?
B. Discuss barbell, laddered and bullet bond portfolios. Discuss current yield curve and your expectations about how the curve may change (flatten, steepen, shift upward-downward etc.). Which bond portfolio would you like to hold then, and why?
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