How did Fed Bullard derive his 3.5% interest rate in 2022?
Bullard derived his 3.5% by tweaking the original Taylor rule.
Let's compute the target rate by using the original Taylor Rule before we work on Bullard's formula.Neutral rate: 2.4%
GDPe: 3%GDPt: 2.3%
Ie: 3.6% (Trimmed mean inflation as stated by Bullard)
It: 2% (As stated by Fed)
Original Taylor Rule: We derive the interest rate to be 3.55% in 2022 using the Taylor rule which is very close to Bullard's rate of 3.5%.
Bullard's formula: The neutral rate is replaced by the real interest rate (-0.5%) & inflation target (2%). The parameter values are also changed to 0 and 1.25 respectively in the modified Taylor rule formula.
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