Related Resources: Engineering Manufacturing Economy

Taylor Rule Equation and Calculator

Engineering Manufacturing Economics Data

The Taylor Rule Equation and Calculator

The Taylor Rule, which is a simple formula that John Taylor devised to guide Federal monetary policymakers. It calculates what the federal funds interest rate should be, as a function of the output gap and current inflation.

Eq. 1 Used by The Federal Reserve

FFR_t = r_t^LR + π_t + 0.5 ( π_t - π^* ) + 0.5 ( y_t - y_t^P )

Where:

FFR_t = Federal funds rate in quarter

r_t^LR = neutral federal funds rate in the longer run (adjusted for inflation)

π_t = four quarter inflation rate

π^* = central bank's objective for inflation

( y_t - y_t^P ) = measures the oercentage difference of GDP from its potential rate

Eq. 2, Taylor's original version

i_t = r_t^* + π_t + a_π ( π_t - π^* ) + a_y ( y_t - y_ave-t )

Where

i_t = target short-term nominal policy interest rate (e.g. the federal funds rate in the US

π_t = the desired rate of inflation

r_t^* = the assumed natural/equilibrium interest rate

π_t = desired rate of inflation

y_t = the natural logarithm of actual GDP

y_ave-t = the natural logarithm of potential output

a_π = typically 0.5, should be a positive number > 0 this is the relative importance of inflation for monetary policy

a_y = 1 - a_π

In the United States, the Federal Open Market Committee controls monetary policy. The committee attempts to achieve an average inflation rate of 2% (with an equal likelihood of higher or lower inflation). The main advantage of a general targeting rule is that a central bank gains the discretion to apply multiple means to achieve the set target.

Source:

Related

• Taylor Rule Trends
• Stock Cost, Profit, Loss Calculator
• Simple Stock Short Selling Profit and Loss Calculator
• Life Cycle Costs Formula and Calculator A representation in present dollars of the cost of an investment over its lifetime is useful for evaluating mutually exclusive alternatives that have the same anticipated lifetime.
• Meeting Cost Calculator - How does the estimate work? We calculate the average hourly cost of each attendee and multiply it by the number of attendees and the duration of the meeting. You can help make the estimate more accurate by ..
• Mortgage
• Credit Card Debt
• Compound Interest
• Stock Value Profit and loss Calculator
• Simple Stock Short Selling Profit and Loss Calculator
• Simple Percentages Calculator
• Percent Error Calculator
• Percent Difference Calculator
• Weekly Hours Worked and Wages Earned Calculator
• Vehicle Car Loan Equation and Calculator