What is the concept of the Taylor rule?

What is the concept of the Taylor rule?

The Taylor rule is a monetary policy guideline that suggests how central banks should adjust interest rates in response to changes in economic conditions. It was proposed by economist John Taylor and is based on the idea that central banks should set interest rates based on the inflation rate and the output gap (the difference between actual and potential GDP). According to the Taylor rule, when inflation is above the target level or the output gap is positive, central banks should raise interest rates to cool down the economy. Conversely, when inflation is below the target level or the output gap is negative, central banks should lower interest rates to stimulate economic growth. The Taylor rule provides a systematic approach for central banks to make interest rate decisions and maintain price stability and economic stability.