Markets: A Rigorous Course

M11 · Problem 8 ★★ Check

Taylor rule sensitivity

Using the dated US inputs in 11.6, compute the Taylor-rule rate for: (i) core PCE, CBO gap, HLW r∗r^*; (ii) headline CPI, CBO gap, HLW r∗r^*; (iii) core PCE, LW gap +1.2%, LW r∗r^* 1.65%; (iv) core PCE, CBO gap, Taylor's r∗=2r^*=2. For India, add an open-economy term ae Δea_e\,\Delta e to the rule, with ae=0.3a_e=0.3 and annual rupee depreciation Δe=4%\Delta e=4\% (assumption). Compute the prescription with CPI 5.54%, r∗=1.5r^*=1.5 and zero gap. Comment on the spread of answers.

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