Taylor rule

A guideline, suggested by John Taylor, an American economist, for how the Federal Reserve should set interest rates. The rule supposes a normal real interest rate of 2%. The Fed will move interest rates up or down depending on the distance between actual inflation and the target rate, and the size of the output gap. In practice central banks prefer to maintain their policy discretion, though they consult rules like Mr Taylor's. For more on the Taylor rule, see this article.