The Taylor Rule

The Taylor Rule is a guideline used by central banks to determine interest rates based on economic conditions. It suggests that when inflation is higher than target levels or the economy is growing too fast, the central bank should raise interest rates to prevent overheating. Conversely, if inflation is low or the economy is weak, it should lower rates to encourage growth. This rule helps stabilize the economy by balancing growth and inflation, guiding monetary policy to maintain a healthy, steady economic environment.