Taylor rule -capital market expectations

CFA Level III Portfolio Management
#1

Hello There,

i would like to understand how the taylor rule works. In CFA Books, it is r(neutral) + i expected.

in schweser it says r(neutral) + i target

which one is correct? I see many answers to the questions in qbank that doesnt even use inflation (target or expected).

thanks

#2

Also keen to understand this, the CFA textbook shows

i∗ = rneutral + πe + 0.5(Ŷe − Ŷtrend) + 0.5(πe−πtarget)

But the two CFA past paper questions I have come across both ignore the consideration for expected inflation. They aren’t specific about nominal or real rates in the question…

#3

it’s the neutral rate plus half the difference between the actual expected inflation and target inflation. So, if expected inflation is higher than the target, the rate will go up to compensate for this. You’re also adding half the difference of the GDP gap (real actual output minus potential) - higher than potential output needs to be mitigated with a higher rate.

Go through the equation from the actual CFA textbook, and try to walk yourself through exactly what’s going on

#4

You did a way better job of explaining this than the CFA textbook. the textbook commits to the idea of real and nominal policy rates which the questions don’t appear to. Thank you!

#5

no prob fam