<p>In effect, the desired real interest rate $R_t$ is <strong>chosen</strong> by the government (via changes in the nominal interest rate). But it is chosen based in the Taylor rule. The "standard" IS-MP-PC model (as in Jones's <em>Macroeconomics</em> textbook), is as follows:</p>

<p><strong>IS</strong>:</p>

<p>$$\tilde{Y}_t = \bar{a} - \bar{b}\left(R_t - \bar{r}\right)$$</p>

<p><strong>PC</strong>:</p>

<p>$$\Delta \pi_t = \bar{v}\tilde{Y}_t + \bar{o}$$</p>

<p><strong>MP</strong> (Taylor rule):</p>

<p>$$R_t = \bar{r} + \bar{m}(\pi_t - \bar{\pi})$$</p>

<p>In the latter equation, the central bank/government choses $R_t$ according to deviations in inflation from the target. As inflation increases, the real interest rate increases. </p>

<p>Now, according to the Phillips Curve, inflation responds <strong>positively</strong> to demand shocks ($\tilde{Y}_t$). In consequence, the real interest rate responds positively to $\tilde{Y}_t$. This is why, in the IS-MP diagram (with axis $R_t$ and $\tilde{Y}_t$), the MP has a positive slope.</p>

CC BY-SA 3.0
2017-02-22T12:02:50.737Z
2017-02-22T12:25:26.073Z
2017-02-22T12:25:26.073Z
luchonacho
<p>I know it's because $\bar n \tilde Y$  is added in but isn't the MP curve chosen by the government?</p>

<macroeconomics><monetary-policy><central-banking>
How does the taylor rule make the MP curve upward sloping?
Mark
# How does the taylor rule make the MP curve upward sloping?

(Asked by: username_0 on 2016-10-20)

I know it's because $\bar n \tilde Y$ is added in but isn't the MP curve chosen by the government?

**Tags:** macroeconomics, monetary-policy, central-banking


---

## 1 answers

### Answer by username_1 on 2017-02-22. Score: 2

In effect, the desired real interest rate $R\_t$ is **chosen** by the government (via changes in the nominal interest rate). But it is chosen based in the Taylor rule. The "standard" IS-MP-PC model (as in Jones's *Macroeconomics* textbook), is as follows:

**IS**:

$$\tilde{Y}\_t = \bar{a} - \bar{b}\left(R\_t - \bar{r}\right)$$

**PC**:

$$\Delta \pi\_t = \bar{v}\tilde{Y}\_t + \bar{o}$$

**MP** (Taylor rule):

$$R\_t = \bar{r} + \bar{m}(\pi\_t - \bar{\pi})$$

In the latter equation, the central bank/government choses $R\_t$ according to deviations in inflation from the target. As inflation increases, the real interest rate increases.

Now, according to the Phillips Curve, inflation responds **positively** to demand shocks ($\tilde{Y}\_t$). In consequence, the real interest rate responds positively to $\tilde{Y}\_t$. This is why, in the IS-MP diagram (with axis $R\_t$ and $\tilde{Y}\_t$), the MP has a positive slope.


---

