Monetary policy reaction function
 | This article has not been added to any content categories. Please help out by adding categories to it so that it can be listed with similar articles, in addition to a stub category. |
The Monetary Policy Reaction Function (MPRF) is the upward-sloping relationship between the inflation rate and the unemployment rate. When the inflation rate rises, a central bank wishing to fight inflation will rise interst rates to reduce output and thus increase the unemployment rate. The MPRF is a function of the Taylor Rule, the Investment-Spending Curve (IS Curve) and Okun's Law
The MPRF has the equation:
u = u0 + Φ(π - πt)
Where Φ is a parameter that tlls us how much unemployment rises when the central bank raises the real interst rate r because it thinks the inflation is too high and needs to be deduced.
The Slope of the MPRF is: 1/Φ
The MPRF is used hand in hand with the Phillips Curve to determine the effects of economic policy. This framework illustrates equilibrium levels of the unemployment rate and the inflation rate in a sticky-price model.
 | This economics-related article is a stub. You can help Wikipedia by expanding it. |