Taylor Rules

The Taylor Rule is a guideline used by central banks to set interest rates based on economic conditions. It suggests that interest rates should be adjusted in response to changes in inflation and economic output. Specifically, if inflation is above the target or if the economy is growing faster than expected, the rule recommends raising interest rates to cool down spending. Conversely, if inflation is low or the economy is slowing, it suggests lowering rates to encourage borrowing and investment. This approach helps maintain stable prices and support economic growth, providing a systematic way to manage monetary policy.