Suppose that when actual inflation is
higher than the Fed wants, (that is,
when 
the Fed raises the real

t 
interest rate above the long-run value
(that is, it sets R t r
in order to bring
inflation down.
When 
, Fed sets R t r
which will

t 
bring inflation up.
1
• Simple Monetary Policy Rule
Real
interest
rate
Long run
interest
rate
Current
inflation
Inflation
target
Governs how
aggressively
monetary policy
responds to
inflation
2
i t r

m

t 



t 
r
2%
m
0. 5

2%
3
4
Percent change in consumer price index from value
preceding year, 1947:M1-2014:M11
9
10
Countries
Industrial
United
States
Japan
Euro Area
1996
2003
46.2
-342.3
-120.2
-530.7
65.4
138.2
88.5
24.9
France
20.8
4.5
Germany
-13.4
55.1
Italy
39.6
-20.7
Spain
0.4
-23.6
12.5
25.3
Australia
-15.8
-30.4
Canada
3.4
17.1
Switzerlan
d
21.3
42.2
United
Kingdom
-10.9
-30.5
Other
Developing
-87.5
205.0
Asia
China
-40.8
7.2
148.3
45.9
Hong Kong
-2.6
17.0
Korea
Taiwan
Thailand
-23.1
10.9
-14.4
11.9
29.3
8.0
-39.1
3.8
Argentina
-6.8
7.4
Brazil
Mexico
-23.2
-2.5
4.0
-8.7
5.9
47.8
Latin
America
Middle East
and Africa
Source: IMF, World Economic Outlook 2014.
13