Taylor Rule Calculator — Monetary Policy Rate
Compute the nominal policy interest rate a central bank should set according to the Taylor Rule — the 1993 benchmark formula balancing inflation control and economic output.
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Taylor Rule: i = r* + π + α(π − π*) + β(y − y*)
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Inflation gap (π − π*)
3.5 − 2 = 1.5 - 2
Inflation gap term (α × gap)
0.5 × 1.5 = 0.75 - 3
Output gap term (β × y)
0.5 × -1 = -0.5 - 4
Nominal policy rate
2 + 3.5 + 0.75 + -0.5 = 5.75Taylor Rule: i = r* + π + α(π − π*) + β(y − y*)
How does this calculator work?
Taylor Rule: i = r* + π + α(π − π*) + β(y − y*). With original coefficients α = β = 0.5, a 1 pp inflation overshoot raises the recommended rate by 1.5 pp. Enter the neutral rate, current and target inflation, and the output gap. All inputs are editable — central bank estimates of r* vary by country and year.
Formula
How this is calculated
The Taylor Rule, introduced by economist John Taylor in 1993, provides a simple benchmark for monetary policy. The formula i = r* + π + α(π − π*) + β(y − y*) has four inputs: r* is the long-run real neutral rate (the rate consistent with full employment and stable inflation — estimated at 0.5–2.5% for major economies as of 2024–2026, though estimates vary widely); π is current inflation; π* is the inflation target (2% for most major central banks); and y − y* is the output gap, the percentage deviation of actual GDP from potential.
The coefficients α and β determine the policy reaction strength. Taylor's original 1993 paper set both at 0.5, meaning every 1 pp inflation overshoot above target raises the recommended rate by 1.5 pp (1 pp from the inflation term plus 0.5 pp from the inflation gap). Higher α means a more hawkish central bank; higher β puts more weight on economic slack. The chart traces the recommended rate across a range of inflation values, holding all other parameters fixed, so you can see the policy reaction function slope.
The Taylor Rule is a descriptive benchmark and a tool for policy debate — real central banks also weigh financial stability, exchange rates, expectations and uncertainty. The implied real rate (i − π) should exceed r* when inflation is above target, and fall below when the output gap is negative.
Frequently asked questions
When the formula yields a rate below zero, conventional rate cuts cannot deliver the required stimulus. This was common in 2009–2020 in many developed economies, prompting quantitative easing and forward guidance. The Taylor Rule itself does not change; it just identifies that the zero lower bound is a binding constraint.
r* is the unobservable real interest rate at which the economy grows at potential with stable inflation. Fed economists (Laubach–Williams) estimated it near 0.5% in the 2010s; more recent 2024–2026 estimates put it 0.7–1.5% for the US. The default 2% is a common historical assumption — edit it to match your preferred estimate.
The output gap is (actual GDP − potential GDP) / potential GDP × 100, published quarterly by the IMF, OECD, and central banks. A gap below −1% signals recession; above +1% signals overheating. Estimates are revised frequently and differ across institutions, so treat them as approximate inputs.
Also known as
TG we-Calculate Editorial Team. (2026). Taylor Rule Calculator — Monetary Policy Rate [Online calculator]. TG we-Calculate. https://we-calculate.com/calculator/taylor-rule-calculator
TG we-Calculate Editorial Team. "Taylor Rule Calculator — Monetary Policy Rate." TG we-Calculate. 2026. https://we-calculate.com/calculator/taylor-rule-calculator.
TG we-Calculate Editorial Team, "Taylor Rule Calculator — Monetary Policy Rate," TG we-Calculate, 2026. [Online]. Available: https://we-calculate.com/calculator/taylor-rule-calculator
@misc{wecalculate_taylor_rule_calculator, title = {Taylor Rule Calculator — Monetary Policy Rate}, author = {{TG we-Calculate Editorial Team}}, howpublished = {\url{https://we-calculate.com/calculator/taylor-rule-calculator}}, year = {2026}, note = {TG we-Calculate} }
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