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Federal Reserve Bank of Cleveland
Economic Commentary
Gaps versus growth rates in the Taylor Rule
Charles T. Carlstrom
Timothy S. Fuerst

There are many possible formulations of the Taylor rule. We consider two that use different measures of economic activity to which the Fed could react, the output gap and the growth rate of GDP, and investigate which captures past movements of the fed funds rate more closely. Looking at these rules through the lens of a partial-adjustment Taylor rule, we conclude that the gap rule does a better job of explaining the actual funds rate data, and provides a better rule-of-thumb for understanding historical monetary policy.

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Charles T. Carlstrom & Timothy S. Fuerst, "Gaps versus growth rates in the Taylor Rule" , Federal Reserve Bank of Cleveland, Economic Commentary, issue Oct, 2012.
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