The rule indicates that increases in both inflation and in output would result in the Fed/CB increasing the interest rate. The paragraph on page 195 of the book that starts with 'That's the rule' also indicates this. The last sentence of the paragraph states:
"Ditto a high output number: Short- and long-term interest rates rise."
However, in the Executive Summary in the book on page 197, #3 states "The Taylor rule is an approximate description of how central banks set interest rates: They raise them in response to increases in inflation and reductions in output."
Can you please clarify why the interest rate would increase if there was a reduction in output? Wouldn't the interest rate increase if there was an increase in output?
DaveBackus
commented
9 years ago
Possible mistake in summary. A student writes:
The rule indicates that increases in both inflation and in output would result in the Fed/CB increasing the interest rate. The paragraph on page 195 of the book that starts with 'That's the rule' also indicates this. The last sentence of the paragraph states:
"Ditto a high output number: Short- and long-term interest rates rise."
However, in the Executive Summary in the book on page 197, #3 states "The Taylor rule is an approximate description of how central banks set interest rates: They raise them in response to increases in inflation and reductions in output."
Can you please clarify why the interest rate would increase if there was a reduction in output? Wouldn't the interest rate increase if there was an increase in output?