How Central Banks Use the Taylor Rule

In this episode of Monetary Policy Explained with Fexingo, Lucas and Luna take a deep dive into the Taylor Rule—the simple formula central bankers use to set interest rates based on inflation and output gaps. Using the current mid-2026 environment as a backdrop, they explain how the rule works, why it's been controversial since the 2007-2009 financial crisis, and how the Federal Reserve has adapted it over time. They walk through a concrete example: if inflation is 3% and the output gap is -1%, what should the policy rate be? They also discuss the limitations of the rule, from the zero lower bound to the r-star problem. The episode touches on John Taylor's original 1993 paper, the 1990s 'Taylor Rule era,' and why central bankers now treat the rule as a guide rather than a rigid formula. Listeners will come away understanding one of the most important concepts in modern monetary economics and how it shapes the rates on their mortgages and savings accounts. #TaylorRule #MonetaryPolicy #CentralBanks #FederalReserve #JohnTaylor #InterestRates #InflationTargeting #OutputGap #RStar #ZeroLowerBound #Economics #Macroprudential #FOMC #Fed #RuleBasedPolicy #FexingoBusiness #BusinessPodcast #MonetaryPolicyExplained Keep every episode free: buymeacoffee.com/fexingo