[Related to Solved Problem 15.5 on page 541] In discussing the Taylor rule, John Taylor wrote, “I realize that there
are differences of opinion about what is the best rule to
guide policy and that some at the Fed (including Janet Yellen) now prefer a rule with a higher coefficient [on the
output gap].”
a. If Fed policy were guided by a Taylor rule with a coefficient of 1, rather than 0.5, on the output gap, would
the federal funds rate be higher or lower during a
recession? Briefly explain.
b. Why might economists and policymakers disagree
over the best rule to guide monetary policy?
Source: John Taylor, “Cross-Checking ‘Checking in on the Taylor
Rule,’” www.economicsone.com, July 16, 2013.