quiz - interest rate neutural, interest rate target

formula for interest rate neutural and interest rate target

Pls can you elaborate a little further. Thanks.

Are you referring to the Taylor Rule? Something like Fed Funds rate = inflation + .5(GDP-Expected GDP) + .5(inflation - expected inflation) Don’t think that is exactly the right formula though…

neutral rate of inflation + .5(expected gdp growth - long term gdp growth + expected inflation - long term inflation growth)

The equilibrium interest rate in a country (the rate at which a balance between growth and inflation is achieved) is referred to as the neutral rate. Neutural interest rate = inflation + real growth rate of economy Target interest rate = neutural interest rate + 0.5*(GDP growth rate forecast - GDP grwoth rate trend) + 0.5*(inflation forecast - inflation trend)