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Instructional Materials

Taylor Rule (Unemployment Gap)

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FRED Graph

Note

Compare the Effective Federal Funds rate and the "guidance" provided by the Taylor rule between 2017 and 2019. Which one is higher?

(a) The Effective Federal Funds rate.
(b) The "guidance" provided by the Taylor rule.

Compare the Effective Federal Funds rate and the "guidance" provided by the Taylor rule between 2019 and 2020. Answer the following questions:

(1) Why doesn't the Effective Federal Funds rate register negative values?

(2) How can you interpret the "guidance" provided by the Taylor rule to set negative monetary policy interest rates?

NOTE: The above formulation of the Taylor rule is referenced by Fernanda Nechio (2011): https://www.frbsf.org/economic-research/publications/economic-letter/2011/june/monetary-policy-europe/

Consumer Price Index for All Urban Consumers: All Items

-0.1%
Change
March 2025

Effective Federal Funds Rate

4.3%
March 2025

Noncyclical Rate of Unemployment

4.1%
Q4 2035

Civilian Unemployment Rate

4.2%
March 2025

Taylor Rule (GDP Gap)

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FRED Graph

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