Taylor rule

The Taylor rule is a monetary policy for how central banks manage money. It was made by economist John B. Taylor in 1992. The idea is to control the economy by adjusting short-term interest rates. The rule looks at the federal funds rate, price level, and changes in real income.John B. Taylor, Discretion versus policy rules in practice (1993), Stanford University, y, Stanford, CA 94905 It figures out the best federal funds rate based on the gap between the desired inflation rate and the actual inflation rate, plus the gap between actual and natural output level. When inflation is higher than the target, the Taylor rule suggests a higher interest rate. 

In the United States, the Federal Open Market Committee manages money policy, aiming for a 2% average inflation rate. The Taylor rule is different from discretionary policy, which depends on personal views of monetary policy authorities and has fewer factors considered.

References

Category:Economic policy