When the interest rate reaction function---equation 30---is included
in the
model, monetary policy is endogenous. In other words, there is no
exogenous monetary
policy variable to change. One can, however, drop equation 30 and
examine the effects of exogenous changes in RS. This is done in
experiment 6.1.
Experiment 6.1: Increase in the Short Term Interest Rate RS
- Take RS to be exogenous and increase it by 1.0 in each quarter of the
forecast
period. Solve the model.
- Answer the questions posed at the end of Experiment 5.1.
(Experiment 6.1 is
another key experiment that you should have a good understanding of.)
- What did M1 do in response to the increase in RS? Why?
- Remember that -AG is the value of government securities
outstanding. This is the
open market operations variable of the Fed. Note that -AG increased
in the experiment.
Why?
- What was the effect on government interest payments INTG? How did
this affect
SGP?
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