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Assume that the central bank follows the following monetary policy (Taylor) rule: (*) ????????????????=????(????????)+????????, ????gt;0,????gt;0
Assume that the central bank follows the following monetary policy (Taylor) rule: (*) ????????????−????̅=????̅(????−????̅)+????̅????̃, ????̅>0,????̅>0
????????????
Note that, ????????????, ????̅, ???? , ????̅ and ????̃ are defined as in lectures. ????̅ and ????̅ are parameters. ????????????
The interest rate facing the markets is ???????? = ???????????????? + ????,̅ where ????̅ is financial friction. AS schedule is represented by the following equation:
???? = ???? ???? + ???? ̅ ????̃ + ???? ̅ ????????????
Inflation expectations are a mixture of backward looking expectations and expectations anchored to the inflation target:
The IS schedule is
???????????? =????̅????̅+(1−????̅)????????−1
????̃ =????̅−????̅(???? −????̅) ????????
(a) how do you derive the AS curve
