Taylor Rule
Version 1.0.0 · Updated 2026-07-30
CORE DEFINITION
A "mechanical rule" for how central banks should set nominal interest rates: i = r* + π + 0.5(π - π*) + 0.5(y - y*). Here, i is the nominal interest rate, r* is the equilibrium real interest rate, π is the inflation rate, π* is the target inflation rate, and y is the output gap. It provides a "benchmark rule" for central bank interest rate decisions.
SCAFFOLDING EFFECT
Reduce cognitive load
Policy deviation detection. By comparing the actual policy interest rate with the "theoretical rate" calculated by the Taylor rule, one can see whether the central bank is "hawkish" or "dovish." It acts like a "lie detector" for central bank behavior, revealing whether policy is "too tight" or "too loose."
Anchor fast decisions
An empirical monetary policy rule proposed by John Taylor: policy interest rate = neutral rate + 0.5 × (inflation - inflation target) + 0.5 × output gap. It directly links interest rates to deviations in inflation and output, making policy predictable.
MINIMUM ACTION
In progress 0/4Practice this model in one real situation:
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Source support: Explicit
- en.wikipedia.orghttps://en.wikipedia.org/wiki/Taylor_ruleverified
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