Econ 330 HW2
Monetary Policy
This assignment is under construction.
Instructions
Each problem in this assignment asks you to work with data and/or answer one or more reflection questions about the data. Each chart you produce must be clearly labeled, self-contained, and easy to read. Your answers to the reflection questions should be succint and insightful. When writing your answers, imagine that you are preparing a report for your very busy, non-economist, manager.
You must submit one report (preferable in PDF format) to D2L, which contains all of your charts and your answers to the questions. Once again, your analysis and charts must be self-contained and clearly labeled.
You are allowed to work with others on this assignment, but:
- Be sure to include attribution at the top of your submission. If someone helped you create a document, their name should be somewhere on the document.
- Submitted work should be your own. (Charts will naturally look similar. That’s fine.)
Data Sources:
Problem 1: A few real-world details.
- Where do you keep most of your money? In a savings account? checking account? etc [Max 10 words]
- Give an example of a non-monetary asset that you own. [Max 10 words]
- Choose a bank that you use. Check which Federal Reserve district this bank uses for Reserve Bank Financial Services. Include a screenshot of the spreadsheet row in your submission.
- Check whether that bank is signed up for the FedNow service. Again, include a screenshot of the spreadsheet row in your submission.
If you don’t have any bank accounts, just choose a existing bank at random or ask the Professor to choose one for you.
Problem 2: Fed Interest Rates
- In FRED, plot a chart with the following data series from 2010-2025:
- Why are there two separate series for interest on reserves? [Max 15 words.]
- Why did the Fed lower the interest rate in 2020? [Max 15 words.]
- Why did they start raising it in 2022? [Max 15 words.]
The graph for Problem 1.1 should look something like the following:
Problem 3: Taylor Rule
- Plot the inflation gap (Inflation - 2%) and output gap (Real GDP - Potential GDP) from 1990-2025..
- Plot the Taylor Rule alongside the Federal Funds Rate from from 1990-2025.
Additional Context:
The Inflation Gap can be calculated simply by taking the inflation rate (annual % change in the price level) and subtracting 2%.
The Output gap is the difference between real (inflation-adjusted) GDP and real “potential GDP”. If we express this gap in percentage terms, we get:
\[\text{Output Gap} = {\text{Real GDP}-\text{Real Potential GDP} \over \text{Real Potential GDP}} \times 100\]In FRED, we can find Real GDP under the mnemonic GDPC1, and we can find an estimate of potential GDP from the Congressional Budget Office under GDPPOT.
If we plot the inflation gap and output gap together, we’ll get a graph that looks something like this:
The Taylor Rule says that the Fed Funds target rate should be set according to:
\[\text{Taylor Rule Rate} = \text{Inflation Rate} + 2\% + \frac{1}{2}\text{Inflation Gap}+\frac{1}{2}\text{Output Gap}\]The “Inflation Rate + 2%” at the start is a stand-in for the equilibrium fed funds rate, that is the rate of interest that will naturally make credit markets function efficiently. The Taylor Rule says that if inflation goes up, we should raise the rates (to fight inflation), and that if GDP goes down, we should lower them (to stimulate the economy). If you compare this rule to the actual interest rates set by the Fed, then you’ll get a graph that looks something like this one:
Your styling will look a bit different. (Ideally, if you’re willing to put in a bit of extra work, you’ll download the data as a spreadsheet and create a graph with an actually readable y-axis label.)