Compare the behavior of the interest rate

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Reference no: EM131221803

Consider a variation on the Taylor rule:

where r is the real interest rate in a quarter, r TAYLOR is the interest rate implied by the Taylor rule, and r(-1) is the interest rate in the previous quarter. Call this rule TR-S.

a. Compare the behavior of the interest rate under TR-S to its behavior under the basic Taylor rule.

b. Is TR-S a realistic description of central banks' behavior? Why might they follow such a rule rather than the basic Taylor rule?

Reference no: EM131221803

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