Monetary policy reaction function: Difference between revisions

Revision as of 12:49, 18 August 2006

Revision as of 23:44, 25 October 2007

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The MPRF is used hand in hand with the [[Phillips Curve]] to determine the effects of [[economic policy]]. This framework illustrates [[equilibrium]] levels of the [[unemployment rate]] and the [[inflation rate]] in a [[sticky-price model]].

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Alternatively, in Ben Bernanke and Robert Frank's [http://catalogs.mhhe.com/mhhe/viewProductDetails.do?isbn=0073230596 Principles of Economics] textbook, '''the MPRF is a model of the Fed's interest rate behavior'''. In its most simple form, the MPRF is an upward-sloping relationship between the real interest rate and the inflation rate. The following is an example of an MPRF from the third edition of the textbook:<br /><br />

r = r* + g(π - π*)

r = target real interest rate (or actual real interest rate)<br />

r* = long-run target for the real interest rate<br />

g = constant term (or the slope of the MPRF)<br />

π = actual inflation rate<br />

π* = long-run target for the inflation rate<br /><br />

Of course, the MPRF above is just one example, and there are other examples (such as the [http://www.stanford.edu/~johntayl/Papers/Discretion.PDF Taylor Rule]) that are more complex.

The following graph (from the [http://econblog.aplia.com/2007/10/monetary-policy-reaction-function.html?showComments=false Aplia Econ Blog]) shows the simple MPRF with the real interest rate on the Y-axis and the inflation rate on the X-axis. Assume a 3% actual and long-run target inflation rate.

[[Image:Mprf.png]]