Taylor rule is an Economic model which analyses inflationary
pressure of an Economy forecasts interest rates in order to
stabilize the Economy.
The Taylor rule is important for monetary policy decisions as
it describes the interest rate decisions of the federal open Market
committee as it is considered as a benchmark for monetary
policy.
The Taylor rule states that central bank must change the
interest rates in accordance with the inflation and various other
conditions with in an Economy
According to this rule, when GDP is undergoing rapid growth
above its potential level or when the Economy is under inflationary
pressure, the federal reserve should raise interest rates and when
the GDP growth is below its potential level and when there is less
inflationary pressure in the Economy, the fed should lower the
interest rates