What is the Taylor Rule?
The Taylor rule is an economic concept that suggests how the United States Federal Reserve or any central bank should set short-term interest rates. Proposed by a Stanford University economist, the rule is meant as a guideline for balancing complicated nationwide economic factors. Many experts suggest that the general adherence of the US Federal Reserve to the Taylor rule has kept inflation under control throughout the United States. The interest rate is a fee charged on borrowed money or assets. Lenders make most of their money through the interest charged on loans. In the United States, the Federal Reserve sets the interest rate at which banks can charge each other for interbank loans. Setting the reserve rate can stabilize the amount of money in the economy, and help maintain inflation levels. The Taylor rule is often followed as a rule of thumb for how the interest rate should be adjusted. Two concerns factor into setting interest rates: employment levels and inflation. Inflation i
  The Taylor Rule gained popularity after its appeared because it was relatively simple and made it possible to make forecasts of central bank interest rates with just a few variables. Prof. Taylor calibrated the monetary policy rule bearing his name with figures for the US economy from 1984 to 1992 and in that period the correctness of results proved high. Furthermore, it turned out that other central banks seemed to adjust their monetary policy ex post to the dictates of the Taylor Rule.
