The Taylor rule is a modern monetary rule proposed by economist John B. Taylor that would stipulate exactly how much the Federal Reserve should change the interest rates in response to real divergences of real GDP from potential GDP and divergences of actual rates of inflation from a target rate of inflation.

The Taylor Rule

<math>i_t = .04 + 1.5(\pi_t - .02)+ .5(y_t - \bar y_t)<math>

Where <math>i_t<math> is the target federal funds rate, <math>\pi_t<math> is the rate of inflation as measured by the GDP deflator, <math>y_t<math> is the logarithm of real GDP, and <math>\bar y_t<math> is the logarithm of potential output, as determined by a linear trend.

--Jgraber 22:47, 20 Sep 2004 (UTC)