Can anyone explain the logic of this forumula: FFR = (2% + actual inflation) + 0.5(actual inflation - 2%) + 0.5(output gap)
My thought is Know the Taylor rule is Keynsian and it is used to set how much short term rates will change. Don’t waste space on the logic behind a formula that I don’t think we will EVER have to calculate If you are fortunate enough to already know the formula plug in numbers and who cares why.
To be able to understand this formula, you should get a PhD in economics.
there is a trade off: if you raise rate, you lower inflation but decrease output. if you lower rates, you increase inflation but boost output. Taylor rule provides a systematic way to deal with the trade off.