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The '''monetary policy reaction function''' (MPRF) is thea upward-slopingfunction relationshipthat betweengives the [[inflationvalue rate]]of and thea [[unemploymentmonetary ratepolicy]]. Whentool the [[inflation rate]] rises,that a [[central bank]] wishingchooses, toor fightis [[inflation]]recommended willto raisechoose, [[interestin rates]]response to reducesome outputindicator and thus increase theof [[unemploymenteconomy|economic rateconditions]].
==Examples==
The MPRF is explained by the [[Taylor rule]], the [[LM curve]], and [[Okun's law]].{{cn|date=August 2013}}
One such reaction function is the [[Taylor rule]]. It specifies the [[nominal interest rate]] set by the central bank in reaction to the [[inflation rate]], the assumed long-term [[real interest rate]], the deviation of the inflation rate from its desired value, and the log of the ratio of real [[GDP]] (output) to [[potential output]].
The MPRF has the equation:
Alternatively, in [[Ben Bernanke]] and [[Robert H. Frank]] 's<ref>Bernanke, Ben, and Frank, Robert. ''Principles of Economics'' textbook, the3rd MPRFedition.</ref>{{full|date=August is2013}} a model ofpresent the Fed'sfunction, interest rate behavior. Inin its most simplesimplest form, the MPRF isas 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{{full|date=August 2013}}: ▼<math>u = u_{0} + \Phi(\pi - \pi_{t})</math>
where <math>\Phi</math> is a parameter that tells us how much unemployment rises when the [[central bank]] raises the [[real interest rate]] <math>r</math> because it thinks that [[inflation]] is too high and needs to be reduced.
where
The slope of the MPRF is <math>\frac{1}{\Phi}.</math>
:r * = long-runcurrent target for the real interest rate<br /> ▼
The MPRF is used hand-in-hand with the [[Phillips Curve]] to determine the effects of [[economic policy]]. This framework illustrates [[Underemployment equilibrium|equilibrium]] levels of the [[unemployment rate]] and the [[inflation rate]] in a [[sticky-price model]].
π:r* = long-run target for the inflationreal interest rate <br />▼
:g = constant term (or the slope of the MPRF)<br /> ▼
== Alternative ==
:π = actual inflation rate<br /> ▼
▲Alternatively, in [[Ben Bernanke]] and [[Robert H. Frank]]'s ''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{{full|date=August 2013}}:
:π* = long-run target for the inflation rate
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
Of course, the MPRF above is just one example, and there are other examples (such as the [[Taylor rule]]) that are more complex.
== References ==
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