Taylor Rule

The Taylor Rule is a guideline used by central banks to determine the optimal interest rate based on economic conditions. It suggests that interest rates should be adjusted according to inflation and economic output. Specifically, if inflation is above a target level or the economy is growing faster than expected, the rule recommends raising interest rates to cool down the economy. Conversely, if inflation is below target or growth is slow, it suggests lowering rates to stimulate spending and investment. Essentially, the Taylor Rule helps maintain economic stability by balancing inflation and growth through interest rate changes.