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. 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

  1. ↑ "Interview with John B. Taylor | Federal Reserve Bank of Minneapolis". www.minneapolisfed.org. Retrieved 2024-01-05.
  2. ↑ Trehan, John P. Judd, Bharat (2001), "Has the Fed Gotten Tougher on Inflation?", Handbook of Monetary Policy, Routledge, pp. 635–639, doi:10.4324/9780429270949-48, ISBN 978-0-429-27094-9, retrieved 2024-01-05{{citation}}: CS1 maint: multiple names: authors list (link) CS1 maint: work parameter with ISBN (link)
  3. ↑ John B. Taylor, Discretion versus policy rules in practice (1993), Stanford University, y, Stanford, CA 94905
  4. ↑ Mishkin, Frederic (2011). "Monetary Policy Strategy: Lessons from the Crisis". National Bureau of Economic Research. Cambridge, MA. doi:10.3386/w16755.
  5. ↑ Svensson, Lars E. (2002). "What is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules". National Bureau of Economic Research. Cambridge, MA. doi:10.3386/w9421.