The previous model to Taylor Rules was the Monetary Conditions Index. Both were designed to assess where is the appropriate level of the Fed funds Rate yet applies to any nation to determine the correct level of Interest rates.
Fed Funds vs Taylor Rules correct level: 1.207
Taylor Rules to determine the correct rate of the 90 Day Interest rate. 1.94
So 1.20 and 1.94 Vs Headline 0.25 and current overnight Rate 0.08
Taylor Rule Calculations
Target = Inflation + 0.5 X (Inflation – Inflation) +0.5 X (GDP Minus GDP) + Interest (Overnight rate)
Taylor Rules 90 Day Rate
Target = 90 Day Rate + Inflation Target + 1.5 X (Inflation – Inflation) +0.5
Technically the Output Gap supposed to include as the last term but its not necessary.
Monetary Conditions Index
The Monetary Conditions Index gauges the level of the interest rate and Exchange Rate to the Trade Weight Index. Its a fabulous tool and reveals much. See the EUR chart below. We don’t hear about MCI anymore but we hear about Taylor Rules yet its a vital tool.
Monetary Conditions Index EUROPE