<p>In Chapter 3 of Gali's famous Monetary Policy book, he measures the effects of a monetary policy shock.</p>

<p>The interest rate rule is:</p>

<p><a href="https://i.sstatic.net/xGQs6.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/xGQs6.png" alt="enter image description here"></a></p>

<p>Then a shock <span class="math-container">$v_t &gt; 0$</span> occurs.</p>

<p>He proceeds to measure how this affects <span class="math-container">$y$</span>, <span class="math-container">$\pi$</span> and <span class="math-container">$r$</span> (output, inflation, and real interest).</p>

<p>As you would expect, <span class="math-container">$y, \pi$</span> go down, <span class="math-container">$r$</span> goes up. However, he then derives the following equation, which measures what happens to the nominal interest rate:</p>

<p><a href="https://i.sstatic.net/3Mei7.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/3Mei7.png" alt="enter image description here"></a></p>

<p><strong>However</strong>, I simply cannot for the life of me figure out how he derives this equation. I mean, I totally get that he's just using the Fisher equation. But why doesn't he go back to the interest rate rule from the first picture and use that? Why is he suddenly ignoring his own rule and relying fully on a basic identity like the Fisher equation? </p>

CC BY-SA 4.0
2018-12-09T02:19:00.050Z
This question is not formulated in a such a way that any person without a copy of this specific text will be able to help you. You should define everything here etc. so that your question is self contained.
123
CC BY-SA 4.0
2018-12-09T02:29:09.620Z
Okay, here you go:https://perhuaman.files.wordpress.com/2014/06/gali_polc3adtica_monetaria.pdf
Mashim
CC BY-SA 4.0
2018-12-09T06:06:45.577Z
this does not render your question self-contained.
E. Sommer
<monetary-policy>
A question about a derivation in Gali's Monetary Policy book
Mashim
# A question about a derivation in Gali's Monetary Policy book

(Asked by: username_0 on 2018-12-09)

In Chapter 3 of Gali's famous Monetary Policy book, he measures the effects of a monetary policy shock.

The interest rate rule is:

[![enter image description here](https://i.sstatic.net/xGQs6.png)](https://i.sstatic.net/xGQs6.png)

Then a shock $v\_t > 0$ occurs.

He proceeds to measure how this affects $y$, $\pi$ and $r$ (output, inflation, and real interest).

As you would expect, $y, \pi$ go down, $r$ goes up. However, he then derives the following equation, which measures what happens to the nominal interest rate:

[![enter image description here](https://i.sstatic.net/3Mei7.png)](https://i.sstatic.net/3Mei7.png)

**However**, I simply cannot for the life of me figure out how he derives this equation. I mean, I totally get that he's just using the Fisher equation. But why doesn't he go back to the interest rate rule from the first picture and use that? Why is he suddenly ignoring his own rule and relying fully on a basic identity like the Fisher equation?

**Tags:** monetary-policy

> **Comments:**
> **username_1**: This question is not formulated in a such a way that any person without a copy of this specific text will be able to help you. You should define everything here etc. so that your question is self contained.  
> **username_0**: Okay, here you go:https://perhuaman.files.wordpress.com/2014/06/gali_polc3adtica_monetaria.pdf  
> **username_2**: this does not render your question self-contained.  

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