Question
Suppose a central bank does not satisfy the Taylor principle; in particular, assume that the responsiveness of the target interest rate to inflation is slightly
Suppose a central bank does not satisfy the Taylor principle; in particular, assume that the responsiveness of the target interest rate to inflation is slightly less than zero, so that the nominal interest rate rises less than one for one with inflation. Use a graph similar to Figure 15-13 to analyze the impact of a supply shock. Does this analysis contradict or reinforce the Taylor principle as a guideline for the design of monetary policy?
Hi! Sorry I didn't include the Figure 15-13. Otherwise, the question is complete. The image isn't uploading but I'm trying. Here it is:
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