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Press Release

Forecasters appear to use different versions of the Taylor rule or no such rule at all, say Cleveland Fed researchers

The Taylor rule postulates that the Federal Reserve chooses deviations of the federal funds rate from its long-run target level based on the inflation gap (deviation of inflation from its long-term target of 2 percent), the unemployment gap, and the past funds rate. While such a rule necessarily abstracts from the many complexities that factor into the Fed’s actual setting of the federal funds rate target, it can effectively capture the historical evolution of monetary policy.

Federal Reserve Bank of Cleveland researchers Charles T. Carlstrom and Timothy Stehulak explore whether professional forecasters appear to use a Taylor rule when they forecast the future funds rate, and if so, how similar their implied rules are to each other and to those of a Taylor rule that best fits the historical data. The researchers use projections from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters to estimate forecasters’ Taylor rule regression coefficients. According to Carlstrom and Stehulak, if the coefficients for each forecaster differ a great deal, it suggests that they use different versions of the Taylor rule or they don’t use such a rule at all.

Carlstrom and Stehulak find a tremendous amount of variability in the coefficients. They range from a forecaster who sees basically no relationship between his funds rate forecast and his inflation and unemployment forecasts, to a forecaster who responds strongly to both inflation and unemployment. Perhaps even more interesting, say the researchers, is that none of the forecasters has Taylor rule coefficients that closely resemble an estimated Taylor rule.

Read Implied Taylor Rules Among Forecasters

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell,, 513.455.4479