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Taylor Rule definitions

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  • Taylor Rule
    A mathematical guideline estimating the central bank's target interest rate using inflation and output gaps.
  • Federal Funds Rate
    The interest rate charged on overnight loans between banks to meet reserve requirements.
  • Monetary Policy
    Central bank actions influencing money supply and interest rates to stabilize the economy.
  • Inflation Rate
    The percentage change in average prices within an economy over a specific period.
  • Equilibrium Real Federal Funds Rate
    A benchmark interest rate adjusted for inflation, often set at 2% for policy calculations.
  • Inflation Gap
    The difference between current inflation and the central bank's target inflation rate.
  • Output Gap
    The difference between actual GDP and potential GDP, indicating economic slack or overheating.
  • Potential GDP
    The maximum output an economy can achieve without causing inflationary pressures.
  • Equilibrium Interest Rate
    The rate at which money supply and demand balance in the money market.
  • Reserve Requirements
    Regulations mandating banks to hold a minimum amount of funds relative to deposits.
  • Money Market
    A financial market for short-term borrowing and lending, including overnight bank loans.
  • Target Inflation Rate
    The central bank's preferred annual percentage increase in prices, often set at 2%.
  • Long Run Equilibrium
    A state where economic variables, such as interest rates, align with policy targets and potential output.