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Taylor Rule Calculator

Calculate a generalized Taylor-type policy-rate benchmark from prior-four-quarter inflation and real-output inputs.

Published

Modeled policy-rate benchmark

Rate implied by the rule
5.33%
Inflation gap
2%
Real output gap
-3.333%
Neutral real-rate assumption
2%

A generalized Taylor-type benchmark with fixed 0.5 gap coefficients, not a forecast or policy prescription.

%

Percent change over the prior four quarters for one stated price index.

%

Real-output units on the same price and scale basis as potential or trend real GDP.

Use the same real-output units, price basis, and scale as actual real GDP.

%

Results update as you type.

Generalized Taylor-type benchmark

Enter inflation over the prior four quarters for one stated price index, an inflation target, actual real GDP, potential or trend real GDP on the same basis and scale, and a neutral real-rate assumption. The result is a modeled policy-rate benchmark, not a federal-funds target for every economy.

Source-backed method

The Federal Reserve’s generalized restatement can be written:

benchmark=r∗+π+0.5(π−π∗)+0.5(100×Y−Y∗Y∗)\text{benchmark}=r^*+\pi+0.5(\pi-\pi^*)+ 0.5\left(100\times\frac{Y-Y^*}{Y^*}\right)

Here, r^* is the neutral real-rate assumption, π is prior-four-quarter inflation, π^* is the inflation target, Y is actual real GDP, and Y^* is potential or trend real GDP.

Taylor’s 1993 special case used a 2% inflation target, 2% equilibrium real rate, prior-four-quarter inflation, and real GDP relative to trend real GDP. Changing the target or neutral rate creates a generalized scenario rather than the exact 1993 equation. The inflation-gap and output-gap coefficients remain fixed at 0.5.

Publisher arithmetic and example

Gap subtraction, output-gap division, percentage conversion, and display rounding are transparent publisher arithmetic.

The 4% inflation and GDP defaults are illustrative. With 4% inflation, a 2% target, actual real GDP of 2.9 billion units, potential real GDP of 3 billion units, and a 2% neutral real rate:

inflation gap=4−2=2 percentage points\text{inflation gap}=4-2=2\text{ percentage points} real output gap=100×2.9−33=−3.333%\text{real output gap}=100\times\frac{2.9-3}{3}=-3.333\% benchmark=2+4+0.5(2)+0.5(−3.333)=5.33%\text{benchmark}=2+4+0.5(2)+0.5(-3.333)=5.33\%

Limits

Potential output, neutral rates, and inflation measurement are uncertain. Alternative policy rules use different coefficients and variables. Policymakers consult but do not mechanically follow policy rules; they use broader information and judgment. No central-bank prediction or policy recommendation is provided.

For the price and rate inputs behind the benchmark, use the Inflation Calculator, the Fisher Effect Calculator, and the Real Interest Rate Calculator; the Phillips Curve Calculator models the inflation-unemployment trade-off often paired with policy-rule analysis.

Sources

  • John B. Taylor, “Discretion versus policy rules in practice”, Carnegie-Rochester Conference Series on Public Policy 39 (1993), 195–214 — journal page 202, equation (1) and variable definitions, supports the classic equation and constants; page 203 discusses deviations and special factors.
  • Board of Governors of the Federal Reserve System, “Principles for the Conduct of Monetary Policy” (updated 2018-03-08) — “The Taylor rule” supports the generalized restatement, four-quarter inflation, percentage GDP gap, and classic constants; the following limitations paragraphs support nonmechanical use.
  • Board of Governors of the Federal Reserve System, “Policy Rules and How Policymakers Use Them” (updated 2018-03-08) — “Alternative policy rules” and “Fed policymakers consult, but do not mechanically follow, policy rules” support benchmark wording and measurement limits.

Frequently asked questions

What does the Taylor rule calculator compute?
It computes a generalized policy-rate benchmark equal to the neutral real-rate assumption plus prior-four-quarter inflation plus 0.5 times the inflation gap plus 0.5 times the percentage real output gap. The gap coefficients stay fixed at 0.5.
How is the output gap expressed?
The percentage real output gap is 100 times actual real GDP minus potential real GDP divided by potential real GDP. Both inputs must be on the same basis and scale, so the gap can be negative when actual output is below potential.
When is the result the original 1993 Taylor rule?
Taylor's 1993 special case used a 2% inflation target, a 2% equilibrium real rate, prior-four-quarter inflation, and real GDP relative to trend real GDP. Changing the target or neutral rate creates a generalized scenario rather than the exact 1993 equation, and the result is a modeled benchmark, not a central-bank prediction or recommendation.

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