The Taylor Interest Rate is a monetary policy targeting rule proposed by economist John B. Taylor in 1992. The formula to derive a target interest rate is calculated using the Nominal Federal Funds Rate, the Rate of Inflation, and the deviation between the current real GDP and potential GDP if the country were operating at full capacity, also known as the GDP Output Gap. The OECD calculates the GDP Output Gap for select countries; if it is unavailable, the country’s Employment Rate is substituted. The Taylor rule adds the amount by which a country’s inflation exceeds 2% to an assumed equilibrium federal funds rate of 2% in determining the short-term interest rate, so as inflation increases, so does the Taylor Interest Rate.
The unEmployment Rate is the percentage of workers who are actively looking for work but cannot obtain it, calculated by dividing the number of unemployed persons by the number employed in the labor force. Countries may vary in what age range they use to determine whether workers are part of the employment cohort (i.e., whether they exclude workers under age 16 or after they reach age 66 for instance). Classical economists believe unemployment results from unions and bureaucratic regulations such as minimum wage laws and payroll taxes. John Maynard Keynes believed unemployment resulted from a dearth of money in the economy and recommended public spending and expansionist monetary policies to increase employment. The unEmployment Rate understates actual unemployment because it does not include people not looking for work (4% of the US workforce in 1950 vs. 11% in 2018), or under-employed persons. In the US the underEmployment Rate is called the “U-6” unEmployment Rate, reaching 17.1% in May 2010 compared to the official 9.9% unEmployment Rate.
