Taylor rule calculator
The Taylor rule says where a central bank's policy rate should sit, given inflation, its target, the neutral real rate and the output gap. Change any input and the prescribed rate updates. Add the actual policy rate to see how far the bank is from the rule.
Taylor used 2. Most recent estimates for advanced economies sit between 0.5 and 1.5.
Negative when the economy runs below potential. Leave 0 if unknown.
0.5 in Taylor (1993).
0.5 in Taylor (1993); 1.0 in the 'balanced approach' rule.
Enter it to see how far the central bank is from the rule.
Taylor-rule policy rate: 4.50%
The formula
i = r* + π + a(π − π*) + b(y − y*)
i is the policy rate, r* the neutral real rate, π inflation, π* the inflation target and (y − y*) the output gap, all in percent. Each point of inflation above target raises the prescribed rate by 1 + a points, so with a = 0.5 the real rate rises when inflation does. That property, the Taylor principle, is what keeps inflation anchored.
We run a Taylor rule every day for the countries we score that set their own policy rate. See the central-bank calendar for each bank's gap to the rule, and the methodology for how the behind-the-curve dimension uses it.
Questions
What is the Taylor rule formula?
Policy rate = neutral real rate + inflation + a × (inflation − target) + b × output gap. John Taylor's 1993 paper set both weights, a and b, to 0.5 and the neutral real rate and the inflation target to 2%. With inflation at target and the economy at potential, the rule gives the neutral real rate plus inflation.
What does it mean when the policy rate is below the Taylor rule?
The central bank is setting a lower rate than the rule prescribes for the inflation it faces. That is what 'behind the curve' means. A gap that persists while inflation runs above target is one of the things this site's credibility score penalises.
What should I use for the neutral real rate?
It cannot be observed, only estimated. Taylor assumed 2%. Estimates for advanced economies since 2010 mostly fall between 0.5% and 1.5%. For emerging markets a common shortcut is the economy's trend real growth rate. The result moves one for one with this input, so state the value you used.
What is the 'balanced approach' rule?
It is the Taylor rule with the weight on the output gap raised from 0.5 to 1.0, so the rate responds more to slack in the economy. Set the output-gap weight to 1 in the calculator to use it.