actual inflation rate, inflation target, actual GDP and potential GDP, respectively. When the
actual inflation is equal to the inflation target, and output level is equal to its potential,
the short-term nominal interest rate is equal to the sum of real interest rate and actual
inflation. The sizes of coefficients – h and g – indicate the preference of policy-makers;
h is the inflation rate reaction coefficient, while g is the GDP gap coefficient. If the
coefficient g is valued at zero and the coefficient h is valued as high,