Advantages Of The Taylor Rule

This essay will discuss an established economic model called ‘The Taylor Rule’ for monetary policy. It is a key indicator for economists and was devised in 1992 by the reputable economist John Taylor. It is effectively a model that forecasts interest rates. The essay will firstly talk about the history of the Taylor Rule. It will delve further about the workings of the model, its applicability, functionality and an analysis of its strength and weaknesses. It was also discuss the equation and three factors and briefly contrast the different tactics with NAIRU and the Phillips Curve.

The Taylor Rule arose after issues with other models. This was because John Taylor in the beginnings of 1990 assumed that the rational expectations theory was

It assumes that there are three drivers for price and inflation which is the following, the Consumer Price Index, Employment Index and Producer Prices. It is more common to look at the consumer price index completely these days which is recommended by Taylor as prices such as food is excluded from core consumer price index (Bernanke, 2010). This technique permits a better completed depiction of the economy in regards to inflation and the prices for an onlooker. An increase in prices tends to mean an increase in inflation. Thus, Taylor suggests to factor the rate of inflation over four quarters or one year to gain a complete

That is that the Federal Reserve should ensure that if inflation is over the target or if the growth of the GDP is too fast, they should increase the rates. This is vice versa; rates should be lowered if the inflation is under the target or the GDP growth is sluggish. Neutral rates are established when the growth of the GDP is on its potential and the inflation is meeting the target. Fundamentally, the Taylor rule short term objective is to steady the economy but in the long run it is to stabilize the inflation. Research has demonstrated that in order to better understand the levels of prices and inflation, applying a moving average of different price levels, could deliver a trend and reduce the fluctuations. By following the fed funds rate to find the trends, the same functions should be performed on an interest rate chart every