How this calculator works
The Taylor rule is a simple guide for a central bank policy rate. It starts from the equilibrium real rate plus current inflation, then adds a response to how far inflation sits from its target and to how far output sits from potential. With the common weights of 0.5 on each gap, a one-point rise in the inflation gap raises the prescribed rate by 1.5 points: the one-for-one movement that preserves the real rate plus half a point of tightening. The rule is a description of how central banks have behaved and a benchmark for discussion, not a mechanical policy commitment. Real central banks respond to financial conditions, employment, exchange rates and uncertainty, and they smooth rate changes over time.
Formula
Policy rate = r* + pi + a x (pi - pi*) + b x output gap. The inflation gap is pi - pi*, the output gap is (real GDP - potential GDP) / potential GDP, and the implied real policy rate is the prescribed rate minus current inflation. r* is the equilibrium real rate, pi current inflation, pi* the target and a and b the weights.
Worked example
With an equilibrium real rate of 2%, inflation at 3%, a 2% target, GDP 2.44% above potential and weights of 0.5, the prescribed rate is 2% + 3% + 0.5 x 1% + 0.5 x 2.44% = 6.22%. The implied real policy rate is 3.22%.
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Frequently asked questions
Why does the rule move by 1.5 when inflation rises by one point?
The rate includes current inflation one for one, which keeps the real rate unchanged, plus the 0.5 weight on the inflation gap, which tightens in real terms. Together they give a coefficient of 1.5, known as the Taylor principle when it exceeds one.
Should I use headline or core inflation?
Taylor originally used a GDP deflator-based measure of inflation. Central banks often look at core inflation to strip out volatile food and energy, but the choice changes the prescribed rate, so keep the measure consistent.
What is the equilibrium real rate today?
It is estimated, not observed. Common estimates for advanced economies have ranged from below zero to about 2% depending on the period and method. Treat r-star as an input with uncertainty rather than a known constant.