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taylors rule

Taylor’s rule- this popped up in the practice questions and kind of scared me. do we need to know this? i didn’t see this come up anywhere in the curriculum. did i miss something here? I sincerely hope not. 

"Using Wiley for my CFA journey was by far the best option… I was able to pass on my first attempt.”– Moe E., Canada

Its in PM (economics of investment markets)… and yes, you should know it.

Here and at Level III.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

yes and keep in mind that it includes inflation ( versus the old version that did not)

Cordially,

Ahmed

Removed from Econ though correct? It won’t be tested in PM. Why? Because it’s too plug and chug. CFAI likes to reallllllly make you think on PM questions, from a theoretical and logic based standpoint. ie likes to see if you really understand why things are the way they are. 

Regarding PM, I wouldn’t sleep on the algorithms reading. They drive 75 percent of market trading currently according to CFAI. 

Iprofit4sure wrote:

Removed from Econ though correct? It won’t be tested in PM. Why? Because it’s too plug and chug. CFAI likes to reallllllly make you think on PM questions, from a theoretical and logic based standpoint. ie likes to see if you really understand why things are the way they are. 

Regarding PM, I wouldn’t sleep on the algorithms reading. They drive 75 percent of market trading currently according to CFAI. 

It doesnt have to be plug and chug.. It could more qualative requiring you to think. They could ask the impact of currency inflation if the output gap up or down, and if the inflation gap is up or down… I’ve seen various questions of that nature that doesnt even talk about taylor rule but are implicitly implying taylor rule.

125mph wrote:

Iprofit4sure wrote:

Removed from Econ though correct? It won’t be tested in PM. Why? Because it’s too plug and chug. CFAI likes to reallllllly make you think on PM questions, from a theoretical and logic based standpoint. ie likes to see if you really understand why things are the way they are. 

Regarding PM, I wouldn’t sleep on the algorithms reading. They drive 75 percent of market trading currently according to CFAI. 

It doesnt have to be plug and chug.. It could more qualative requiring you to think. They could ask the impact of currency inflation if the output gap up or down, and if the inflation gap is up or down… I’ve seen various questions of that nature that doesnt even talk about taylor rule but are implicitly implying taylor rule.

Good point

125mph wrote:

It doesnt have to be plug and chug.. It could more qualative requiring you to think. They could ask the impact of currency inflation if the output gap up or down, and if the inflation gap is up or down… I’ve seen various questions of that nature that doesnt even talk about taylor rule but are implicitly implying taylor rule.

But really, this is essentially plug and chug, right? Haven’t looked at this stuff in a while, but couldn’t you just write out the formula and see what happens when one of those elements increases or decreases? Worst case you could plug in reasonable numbers, too.

tickersu wrote:
But really, this is essentially plug and chug, right? Haven’t looked at this stuff in a while, but couldn’t you just write out the formula and see what happens when one of those elements increases or decreases? Worst case you could plug in reasonable numbers, too.

While I understand taylor rule well.. I have a very mild understand how the policy rate links to everything else..So I could easily solve a taylor rule question with plug-chug, I missed the following question on which statement is more correct… and still don’t understand it.

Statement 1: The real value of currency is positively related to its neutral interest rate and inflation gap

Statement 2: The real value of currency is negatively related to output gap and the risk premium demanded by investors for investing in that currency

125mph wrote:

tickersu wrote:
But really, this is essentially plug and chug, right? Haven’t looked at this stuff in a while, but couldn’t you just write out the formula and see what happens when one of those elements increases or decreases? Worst case you could plug in reasonable numbers, too.

While I understand taylor rule well.. I have a very mild understand how the policy rate links to everything else..So I could easily solve a taylor rule question with plug-chug, I missed the following question on which statement is more correct… and still don’t understand it.

Statement 1: The real value of currency is positively related to its neutral interest rate and inflation gap

Statement 2: The real value of currency is negatively related to output gap and the risk premium demanded by investors for investing in that currency

Is the answer statement 2?

Statement 1 is correct because the real value of currency is positively related to output gap, inflation gap, and neutral real interest rate. But like you, I only know this from the formula, I don’t know exactly why. 

Statement 2 is incorrect; Statement 1 is correct.

Real value of currency is positively related to output gap, inflation gap and neutral rate. It is negatively related to risk premium… Only statement 1 is correct. Not so chug and plug!

Iprofit4sure wrote:

Is the answer statement 2?

125mph wrote:

Statement 2 is incorrect; Statement 1 is correct.

Real value of currency is positively related to output gap, inflation gap and neutral rate. It is negatively related to risk premium… Only statement 1 is correct. Not so chug and plug!

Looking only at the formula, I can only conclude 1 is the only correct answer.

Maybe I am missing something, but if you want, maybe you could point out the elements of the equation that suggest 2 is correct? I’m only seeing statement 1.

damn! I might as well not show up next saturday then haha

The way I look at it, real value of currency is positively related to real interest rate. That’s why according to IFR, you want to invest in the currency that has the highest real rate. Then, you break down real interest rate using Taylor Rule, you find that real interest rate is positively related to inflation gap, output gap, and neutral rate. 

As for risk premium, larger risk premium means higher required rate of return which in turns decrease the real value of currency?

I change my mind, this wont be on the test.. This wont be on the test..

Next!

125mph wrote:

I change my mind, this wont be on the test.. This wont be on the test..

Next!

APT, ex post IR, optimal Risk, macro, fundamental statistical factor model more likely. Lol.

if I fail PM tomorrow on CFAI Mock B. I will learn the Taylor Rule :p

125mph wrote:

I change my mind, this wont be on the test.. This wont be on the test..

Next!

My question still stands for you.

tickersu wrote:

My question still stands for you.

Well, I don’t know remember why I picked the 2nd statement as the correct statement. I think I was more than satisfied with the rest of the mock exam so I rushed this one. Perhaps my “intuition” thought the real rate was inversely related to the output, but I ignored the first statement.

Maybe iprofit4sure can give a more concrete example why he choose the 2nd statement!

125mph wrote:

Well, I don’t know remember why I picked the 2nd statement as the correct statement. I think I was more than satisfied with the rest of the mock exam so I rushed this one. Perhaps my “intuition” thought the real rate was inversely related to the output, but I ignored the first statement.

Maybe iprofit4sure can give a more concrete example why he choose the 2nd statement!

Sounds like an easy fix for exam day, though!

125mph wrote:

tickersu wrote:

My question still stands for you.

Well, I don’t know remember why I picked the 2nd statement as the correct statement. I think I was more than satisfied with the rest of the mock exam so I rushed this one. Perhaps my “intuition” thought the real rate was inversely related to the output, but I ignored the first statement.

Maybe iprofit4sure can give a more concrete example why he choose the 2nd statement!

Ya know, I looked at it and thought, I have a 50/50 chance at this. Muchhh better than these questions usually give me. So I mailed it in. 

*Currently reading up on ethics just in case an “Adjustment” comes into play hahah

Just force yourself to remember it, you’ll be fine on the exam. Man, this makes me think of all the times people say “econ major is useless.” Now I really wish I was a econ major, and my financial economics class is next semester, one semester too late. 

S2000magician wrote:

Here and at Level III.

and at level 1 magician… are you forgetting your L1 curriculum? Just kidding of course #omnicient 

Don't forget to carry the one.

PreDRaR66 wrote:
S2000magician wrote:
Here and at Level III.

and at level 1 magician… are you forgetting your L1 curriculum? Just kidding of course #omnicient

I figured that nobody here wanted to be reminded of their agony-filled past.  Thanks for dredging it up.

Onward and upward!

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Ran into another taylor rule problem.. redeemed myself this time:

Which statement is least likely correct:

A.) If the bank’s target inflation is higher than the current inflation rate, the policy rate will be increased

B.) If the current level of output is greater than the bank’s target output, the policy rate will be increased

C.) The real value of currency is negatively related to the risk premium demanded by the investors investing in that currency

Iprofit4sure, your turn?

Isn’t it B?

Taylor rule has taken a way bigger attention that it was supposed to :D

Failure will never overtake me if my determination to succeed is strong enough!

carolinesherif wrote:

Isn’t it B?

Taylor rule has taken a way bigger attention that it was supposed to :D

Incorrect.

125mph wrote:

Ran into another taylor rule problem.. redeemed myself this time:

Which statement is least likely correct:

A.) If the bank’s target inflation is higher than the current inflation rate, the policy rate will be increased

B.) If the current level of output is greater than the bank’s target output, the policy rate will be increased

C.) The real value of currency is negatively related to the risk premium demanded by the investors investing in that currency

Iprofit4sure, your turn?

It is A  (The only Incorrect statement) the policy rate should decrease in this case

Cordially,

Ahmed

125mph wrote:

Ran into another taylor rule problem.. redeemed myself this time:

Which statement is least likely correct:

A.) If the bank’s target inflation is higher than the current inflation rate, the policy rate will be increased

B.) If the current level of output is greater than the bank’s target output, the policy rate will be increased

C.) The real value of currency is negatively related to the risk premium demanded by the investors investing in that currency

Iprofit4sure, your turn?

A

These are macro common sense to some extent. At least the way these choices were phrased. If you know Inflation, vs GDP ie output, monetary/fiscal responses to them going high or lower than projected by a central monetary authority, you will be in decent shape!

is out gap given by potential output- actual output or actual output-potential output. taylor’s rule seems to suggest the second one.