Consider the following simple monetary policy rule:
In the following questions, you are asked to gather data on inflation and short-run output to feed into this policy rule. A good resource for the data you will need is the FRED database of the St. Louis Fed, available at research.stlouisfed.org/fred2/.
(a) Pick some reasonable values for the parameters of this policy rule, and explain why you chose these values.
(b) Obtain data on the CPI inflation rate for the most recent 12-month period possible (you may include food and energy in your CPI calculation or not €” your choice). Discuss briefly this value of the inflation rate.
(c) Create an estimate of á»¸t for the U.S. economy. Explain how to construct this estimate, and discuss its value. You may find it helpful to use the series GDPPOT from the FRED database.
(d) Use these data and the monetary policy rule you specified above to see what fed funds rate the policy rule indicates. How does this compare to the current fed funds rate?
(e) If the rates are different, why do you think that is the case? What would you recommend to the Fed, based on your calculation?