Taylor's Rule

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. John B. Taylor

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

    The former chairman of the Board of Governors of the Federal ...
  3. Inflation

    The rate at which the general level of prices for goods and services ...
  4. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  5. Natural Unemployment

    The lowest rate of unemployment that an economy can sustain over ...
  6. Federal Reserve Board - FRB

    The governing body of the Federal Reserve System. The seven members ...
RELATED FAQS
  1. No results found.
Related Articles
  1. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  2. Investing

    What Has Been Groupon’s Growth Strategy?

    Groupon established a strategy with efforts to become a broader force in the e-commerce world and to expand more strongly into international markets.
  3. Economics

    The Impact Of Ending The US Embargo On Cuba

    Many argue that ending the US embargo on Cuba will not only make US consumers happy, but also help the US economy and bring more freedoms to Cuba.
  4. Economics

    Janet Yellen Vs. Alan Greenspan: Who Is The Better Fed Head?

    We examine how these two histories Fed chairpeople differ and the impact of their views and actions on the world economy.
  5. Economics

    Afraid Of A New Financial Crisis?

    It may be time for the U.S. to adopt a model for financial companies that better deters risky financial behavior.
  6. Personal Finance

    The Canadian Economy, At A Glance

    The 12 economic indicators described here together provide a comprehensive picture of the state of the Canadian economy.
  7. Credit & Loans

    How To Pick The Right Lender When Refinancing A Mortgage

    Refinancing your mortgage has never been easier with the range of lenders and access to information that are available to you.
  8. Entrepreneurship

    Are You A Business Owner Suffering From Stress?

    Don't run yourself down. It's OK to take a vacation. We give you some tips on how to let go.
  9. Economics

    No Exit: What Could Happen If the Eurozone Breaks Up?

    There is no exit strategy for nations in the eurozone or the EU because most members acknowledge that they are far better off together than apart.
  10. Investing

    Reassessing Your Approach To Bond Investing

    Rethinking your fixed-income portfolio may not resonate in quite the same way as dropping 10 pounds or finally giving up that smoking habit.

You May Also Like

Hot Definitions
  1. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  2. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  3. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  4. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  5. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
  6. Fringe Benefits

    A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are ...
Trading Center