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Taylor Rule definitions

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  • Taylor Rule
    A formulaic approach estimating the central bank's target interest rate based on inflation and output deviations.
  • Federal Funds Rate
    The overnight interest rate at which banks lend reserves to each other to meet regulatory requirements.
  • Monetary Policy
    A set of actions by a central bank to influence money supply and interest rates in the economy.
  • John Taylor
    An economist who developed a widely referenced rule for approximating central bank interest rate targets.
  • Equilibrium Real Federal Funds Rate
    The inflation-adjusted interest rate considered optimal for long-term economic stability, often set at 2%.
  • Inflation Rate
    The percentage change in overall price levels within an economy over a specific period.
  • Inflation Gap
    The difference between the current inflation rate and the central bank's target, which can be negative or positive.
  • Output Gap
    The difference between actual GDP and potential GDP, indicating economic underperformance or overheating.
  • Potential GDP
    The maximum output an economy can produce without triggering inflationary pressures.
  • Target Inflation
    The specific inflation rate, often 2%, that a central bank aims to achieve for price stability.
  • Equilibrium Interest Rate
    The interest rate at which money supply and demand are balanced, guiding central bank policy decisions.
  • Reserve Requirements
    Regulations mandating the minimum reserves banks must hold against deposits, influencing lending capacity.
  • Short-Term Loan
    A borrowing arrangement between banks, typically overnight, to meet immediate reserve needs.