Definitions

The underlying policy rules in the model are a response function of the form

R_t = ρR_t – 1 + (1 — ρ)[Ψ_π (π_{t | t – 4} — π*) + Ψ_yygap_t] + ε R t   ,

where R_t is the deviation of the effective federal funds rate from its long-run equilibrium value, π_{t | t – 4} is the four-quarter change in core personal consumption expenditures (PCE) inflation (the one-year-average inflation rate), ygap_t is a measure of the output gap, and ε R t   is a monetary policy shock. The parameters ρ, Ψ_π , and Ψ_y determine how monetary policy reacts to economic conditions.

The baseline rule sets ρ = 0.8, Ψ_π = 2.5, and Ψ_y = 0.5.

This rule uses ρ = 0, Ψ_π = 1.5, and Ψ_y = 0.5. It was proposed in John B. Taylor, “Discretion Versus Policy Rules in Practice,” Carnegie-Rochester Conference Series on Public Policy, 39 (1993), pp. 195–214.

This rule uses ρ = 0, Ψ_π = 1.5, and Ψ_y = 1. It was proposed in John B. Taylor, “A Historical Analysis of Monetary Policy Rules,” in John B. Taylor (ed.), Monetary Policy Rules. Chicago: University of Chicago Press, 1999, pp. 319–348.

This rule uses ρ = 0.85, Ψ_π = 1.5, and Ψ_y = 1. It was proposed in John B. Taylor, “A Historical Analysis of Monetary Policy Rules,” in John B. Taylor (ed.), Monetary Policy Rules. Chicago: University of Chicago Press, 1999, pp. 319–348.

The output gap is the difference between actual output and output in a counterfactual economy without price rigidities and wage rigidities.

The growth gap is the deviation of realized output growth from its longer-run trend.

The long-run equilibrium value of the federal funds rate is the level of the short-term interest rate that would prevail when the economy is growing at its trend pace and inflation is at its target.

The effective federal funds rate (EFFR) is calculated as a volume-weighted median of overnight transactions in the federal funds market. See the Federal Reserve Bank of New York's "Effective Federal Funds Rate" for more information.