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The inertia of monetary policy implications for the fed’s exit strategy

The analytical framework

Since Taylor (1993) macroeconomists have relied on simple interest reaction functions to characterise the endogenous response of monetary policymakers to economic fluctuations. Our very own baseline formula for predicting monetary policymakers’ desired interest can be an extension of the classic “Taylor rule”; it talks about the central bank’s forecast of inflation, the growth rate of output, and the output gap. Our rule departs from the classic Taylor specification for the reason that it permits responses to both output gap and the growth rate of output and in addition in that it permits the central bank to react to the forecast of future macroeconomic variables in keeping with the idea that monetary policy changes remember to affect the economy so policymakers ought to be forward-looking within their policy decisions.