How Central Banks Use the Taylor Rule to Set Interest Rates

Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates · Jul 26, 2026 · 7m · transcript

What formula do central bankers actually consult when setting interest rates? The Taylor Rule, devised by economist John Taylor in 1993, prescribes a policy rate based on inflation, the output gap, and the neutral rate. In this episode, Lucas and Luna unpack how the rule works, why the Federal Reserve pays lip service to it but rarely follows it to the letter, and how its simplicity masks deep disagreements over key inputs like the neutral rate and potential GDP. They walk through real-world applications from the Greenspan era to the post-pandemic tightening cycle, and explore criticisms from…