Just read the Taylor rule and the formula in the note stated as:
- r(target)=r(netural)+0.5(GDP expected - GDP trend)+0.5(expected inflation rate - target inflation rate)
Then, I opened my CFA level 2 note and found a Taylor formula to forecast exchange rate below:
- R= r(neutral)+ Pi + Alpha*(Pi-Pi*)+ Beta *(y-y*)
Are these formulas the same? If so,
-
Why would the first formula’s alpha and beta set to 0.5 by default?
-
Why would the second formula has an additional Pi (inflation) added to the neutral rate?
Thank you!