Taylor Rule Calculator

This is an online taylor rule calculator.

The Taylor rule, proposed by the American economist John B. Taylor in 1992, is one kind of targeting monetary policy rule of a central bank to establish and set prudent interest rates for the short-term stabilization of the economy, while still maintaining long-term growth.

Studies have shown that the actions of the central banks in developed countries can be predicted by the rule. The idea of Taylor rule help to stabilize the economic activity by setting an interest rate that defines the good monetary policy based on the three main indicators:

• Targeted versus actual inflation levels
• Full employment versus actual employment levels
• The short-term interest rate appropriately consistent with full employment

Target Rate = Neutral Rate + 0.5 × (GDPe − GDPt) + 0.5 × (Ie − It)

Where

• Target rate is the short-term interest rate which the central bank should target;
• Neutral rate is the short-term interest rate that prevails when the difference between the actual rate of inflation and target rate of inflation and difference between expected GDP growth rate and long-term growth rate in GDP are both zero;
• GDP_e is expected GDP growth rate;
• GDP_t is long-term GDP growth rate;
• I_e is expected inflation rate; and
• I_t is target inflation rate

Neutral Rate = Short term rate = Feb’ Rate (typically 2%) + The Rate of Inflation (i.e. 2%)

Neutral Rate = 2% + 2% = 4%