Unemployment & Monetary Policy

In this box you will connect the earlier labor market box to monetary policy before, during, and after the financial crisis.

In the earlier box you looked at the unemployment rate for the 2006-2016 period. Now you are going to add inflation and the Fed Funds Rate (the benchmark interest rate of the US).

• Go to BLS.gov and look for 1) the Unemployment Rate, and 2) the Consumer Price Index (inflation).
• Get the Effective Federal Funds Rate from the St. Louis Federal Reserve Bank FRED database.

The relation between interest rates, unemployment, and inflation is clearly stated in the Federal Reserve document accompanying these instructions.

(1,000 words)

The purpose of the box is to analyze these variables within a common framework with emphasis on the Fed’s mandate during the Great Recession with the Taylor Rule in mind [25 points]. Make sure you plot the variables separately [25 points each]. The charts should have a title and have the axis labeled (with time in x-axis, and label the variable and its units in the y-axis).