Taylor's Rule


DEFINITION of 'Taylor's Rule'

A guideline for interest rate manipulation. Taylor's rule was introduced by Stanford economist John Taylor in order to set and adjust prudent rates that will stabilize the economy in the short-term and still maintain long-term growth. This rule is based on three factors:

1) Actual versus targeted inflation levels
2) Actual employment versus full employment levels
3) The appropriate short-term interest rate consistent with full employment.

BREAKING DOWN 'Taylor's Rule'

Taylor's rule suggests that the Fed increases interest rates in times of high inflation, or when employment is above the full employment levels, and decreases interest rates in the opposite situations. This method of controlling interest rates has been fairly consistent with interest policy decisions, even though the Fed does not explicitly subscribe to the rule.

  1. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
  2. Inflation

    The rate at which the general level of prices for goods and services ...
  3. John B. Taylor

    An economics professor and expert on monetary policy. John B. ...
  4. Alan Greenspan

    The former chairman of the Board of Governors of the Federal ...
  5. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  6. Federal Reserve Board - FRB

    The governing body of the Federal Reserve System. The seven members ...
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