<p>Important details are missing, but just think: <em>whose</em> expectations about inflation are included in the monetary policy rule? Model consistency should help you answer your question.</p>

<p>If you provide more details on your model, I will be happy to expand.</p>

CC BY-SA 3.0
2016-10-01T20:17:38.157Z
2016-10-01T20:17:38.157Z
Alecos Papadopoulos
<p>The effect of the Fed's (nominal) policy rate depends on the <em>real interest rate</em>, which is the difference between the nominal interest rate and the <em>expected</em> inflation, as you noted from the Fisher equation.</p>

<p>For example, suppose the Fed's policy rate is set at 8%. On one hand, suppose that people expect prices to rise at 1%, then the real interest rate is 7%. This implies a very tight monetary policy. On the other hand, if expected inflation is very high at 7%, then the policy rate at 8% is quite accommodative. This is why monetary policy rules have to account for inflation expectation.</p>

CC BY-SA 3.0
2017-03-03T04:55:04.670Z
2017-03-03T04:55:04.670Z
Art
<p>I know expected inflation plays a key role in both the Phillips curve equation and the Fisher equation, but does it also play a key role in Taylor's Monetary Policy Rule?</p>

<p>I'm asking this as I have an assignment question which requires me to derive the DAD curve, with a different expected inflation, and I am unsure if I have to change the expected inflation in the monetary policy rule as well.</p>

<macroeconomics><monetary-policy>
Adaptive expectations
Jason Huang
# Adaptive expectations

(Asked by: username_0 on 2016-09-13)

I know expected inflation plays a key role in both the Phillips curve equation and the Fisher equation, but does it also play a key role in Taylor's Monetary Policy Rule?

I'm asking this as I have an assignment question which requires me to derive the DAD curve, with a different expected inflation, and I am unsure if I have to change the expected inflation in the monetary policy rule as well.

**Tags:** macroeconomics, monetary-policy

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## 2 answers

### Answer by username_1 on 2016-10-01. Score: 1

Important details are missing, but just think: *whose* expectations about inflation are included in the monetary policy rule? Model consistency should help you answer your question.

If you provide more details on your model, I will be happy to expand.


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### Answer by username_2 on 2017-03-03. Score: 0

The effect of the Fed's (nominal) policy rate depends on the *real interest rate*, which is the difference between the nominal interest rate and the *expected* inflation, as you noted from the Fisher equation.

For example, suppose the Fed's policy rate is set at 8%. On one hand, suppose that people expect prices to rise at 1%, then the real interest rate is 7%. This implies a very tight monetary policy. On the other hand, if expected inflation is very high at 7%, then the policy rate at 8% is quite accommodative. This is why monetary policy rules have to account for inflation expectation.


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