Consider a variation on the Taylor rule:
where r is the real interest rate in a quarter, r TAYLOR is the interest rate implied by the Taylor rule, and r(-1) is the interest rate in the previous quarter. Call this rule TR-S.
a. Compare the behavior of the interest rate under TR-S to its behavior under the basic Taylor rule.
b. Is TR-S a realistic description of central banks' behavior? Why might they follow such a rule rather than the basic Taylor rule?