Advanced Macro & Growth · intermediate
What moves on the Taylor Rule diagram
Raising the target shifts the entire policy rule down: easier policy at any inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. rate.
The rule line embodies the bank's preferences.
It announces a higher inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. target, the whole line shifts down.
Every inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. reading now gets a gentler response. Credibility question: will expectationsexpectationsBeliefs about the future that shape behavior today, the hinge variable of modern macroeconomics. stay anchored to the NEW target?
Examiners ask this as: inflation target raised, dovish rule shift.
Other scenarios on Taylor Rule