Taylor Rule: Reading vs. Question

CFA Level III Economics
#1

Taylor rule per CFA reading:

target nominal policy rate = Rneutral + expected inflation + 0.5(expected real GDP - trend real GDP) + 0.5(expected inflation - target inflation)

Taylor rule per CFA question/answer:

optimal ST rate rate = Neutral rate + 0.5 × (GDP growth forecast – GDP growth trend) + 0.5 × (Inflation forecast – Inflation target)

Is the difference just that if the question doesn’t say “real GDP” then it’s assumed to be nominal GDP and you don’t add expected inflation?

#2

In general, when interest rates are quoted, they’re nominal rates, not real rates.

If they want you to interpret the neutral rate as a real rate, they’ll specify that it’s a real rate.

1 Like