FINANCIAL CALCULATORS
Taylor Rule Calculator
Calculate the target federal funds interest rate using the Taylor Rule.
What is the Taylor Rule Calculator & How does it work?
The Taylor Rule is a monetary policy rule proposed by economist John B. Taylor in 1993. It suggests how the central bank should set its target for the nominal interest rate based on deviations of inflation from its target and output from potential output.
The formula for the Taylor Rule is:
The formula for the Taylor Rule is:
i = r* + phi_pi (pi – pi^*) + phi_y (y – y^*)
i = target federal funds rate
r* = natural interest rate
pi = current inflation rate
pi^* = target inflation rate
y = output gap (actual GDP – potential GDP)
y^* = desired output gap
phi_pi = weight on inflation
phi_y = weight on the output gap
r* = natural interest rate
pi = current inflation rate
pi^* = target inflation rate
y = output gap (actual GDP – potential GDP)
y^* = desired output gap
phi_pi = weight on inflation
phi_y = weight on the output gap
Parameters
Target Federal Funds Rate—
Frequently Asked Questions
What is the Taylor Rule?
The Taylor Rule is a formula used by central banks to determine the appropriate target federal funds rate based on inflation and output gaps.
How do I use this calculator?
Enter your current inflation rate, target inflation rate, output gap, and natural interest rate into the calculator to find your target federal funds rate.
What is the natural interest rate?
The natural interest rate is the theoretical rate of interest that would exist if the economy was at full employment with stable inflation.
Why is the Taylor Rule important?
The Taylor Rule helps central banks make decisions about monetary policy to stabilize the economy and keep inflation in check.
Can I use this calculator for any country?
This calculator uses a general formula, but specific values like natural interest rates may vary by country. Adjust inputs accordingly for your region.
What is the output gap?
The output gap is the difference between actual GDP and potential GDP, representing the economy’s deviation from its full employment level.
How often should I use this calculator?
Use this calculator periodically to assess monetary policy needs based on current economic conditions.
Results are for informational purposes only and do not constitute professional advice.