Taylor rule
A simple rule proposed by John Taylor in 1993 for setting a central bank policy rate from two things it observes: how far inflation is from target, and how far the economy is from full employment. Move the weights and you can see how much of the last forty years of Fed policy a two-term formula explains, and where it plainly does not.
rate = r* + π + a_π (π − π*) + a_gap × okun × (u* − u)
The output gap here is inferred from unemployment via Okun's law, not measured. Real policy also responds to financial conditions, the effective lower bound, and things a rule cannot see. A gap between the line and the actual rate is not evidence that the Fed was wrong.
Percentage points of output gap per point of unemployment gap
- Rule now
- 8.45%
- Actual now
- 5.42%
- Gap now
- 3.03 pt
- Mean absolute gap
- 1.86 pt
Positive means the rule wants a tighter policy than the one in place
Across 278 months
- US CPI (all items)368 obs · through 1977-08-01
- US unemployment rate355 obs · through 1977-07-01
- Fed funds rate277 obs · through 1977-07-01
Everything is computed in your browser from these series. Nothing is saved, so move the sliders freely — sources and licences.