John Taylor’s rule gives a simple benchmark for the federal funds rate. Fed officials compare several variants (e.g. b = 1 or a lower neutral rate r* of about 0.5–1%).
How to use the Taylor Rule Calculator
- Inflation rate
- Inflation target
- Actual real GDP
- Potential real GDP
- Neutral real interest rate (r*)
- Weight on inflation gap
- Weight on output gap
- Actual policy rate
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter inflation, the target, actual and potential GDP (or the output gap), the neutral real rate, the weights and the actual policy rate.
Tips
- Use real (inflation-adjusted) figures to compare across years.
- Check whether data are seasonally adjusted.
- Use the same currency and base year throughout.
- Economic models simplify reality – treat results as illustrations, not forecasts.
Common mistakes to avoid
- Mixing nominal and real values.
- Comparing percentage changes with percentage-point changes.
- Treating correlations as causes.
Inputs explained
| Field | What to enter |
|---|---|
| Inflation rate | In % |
| Inflation target | In % |
| Actual real GDP | Amount in your currency |
| Potential real GDP | Amount in your currency |
| Neutral real interest rate (r*) | In % |
| Weight on inflation gap | A number |
| Weight on output gap | A number |
| Actual policy rate | In % |
What each result means
- Output gap = ([Actual real GDP] – [Potential real GDP])÷[Potential real GDP]×100
- Taylor rule rate = [Neutral real interest rate (r×)] + [Inflation rate] + [Weight on inflation gap]×([Inflation rate] – [Inflation target]) + [Weight on output gap]×[Output gap]
- Difference from the actual rate = [Actual policy rate] – [Taylor rule rate]
Example values
How the main result changes when Inflation rate changes and everything else stays at the example values above:
| Inflation rate (%) | Taylor rule rate (%) |
|---|---|
| 1.45 | 2.39 |
| 2.18 | 3.47 |
| 2.9 | 4.56 |
| 3.63 | 5.65 |
| 4.35 | 6.74 |
| 5.8 | 8.91 |
Formula
i = r* + π + a × (π − π*) + b × (Y − Y*) ÷ Y* × 100Original Taylor (1993): a = b = 0.5, r* = 2%, π* = 2%Worked example
Inputs — Inflation rate: 2.9 %; Inflation target: 2 %; Actual real GDP: $23,700; Potential real GDP: $23,600; Neutral real interest rate (r*): 1 %; Weight on inflation gap: 0.5; Weight on output gap: 0.5; Actual policy rate: 4 %.
Results — Output gap = 0.42 %; Taylor rule rate = 4.56 %; Difference from the actual rate = -0.56 %; Policy stance = Looser than the rule.
Frequently asked questions
What is the Taylor rule?
A formula suggesting the policy interest rate from inflation and the output gap.
Does the Fed follow the Taylor rule?
It's one benchmark among several, not a strict rule.
What is the neutral rate?
The real rate that neither stimulates nor restrains the economy.
What formula does the Taylor Rule Calculator use?
i = r* + π + a × (π − π*) + b × (Y − Y*) ÷ Y* × 100.