Taylor Swifts can give the economy a BUMP 'N’ GRIND

economictimes.indiatimes.com:

It used three variables: Central bank policy rate. Gap between targeted and actual inflation rate. Output gap, or difference between the actual and potential growth rate.

And, a neat equation gave you the most appropriate policy interest rate. The Taylor rule said central banks should raise their policy interest rate when actual inflation is higher than the targeted inflation rate, and vice versa when inflation is less than targeted. When it was first proposed by Taylor in the early 1990s, it seemed to offer a rule-based solution to a problem that has long dogged central banks — the rules-vs-discretion debate in deciding the 'correct' short-term rate that would keep the wheels of the economy turning, without risking either overheating or a slowdown.

Not surprisingly, it soon became, if not quite the go-to rule for central banks, then certainly a counterpoint to whenever the policy rate differed from what might be suggested by the Taylor Rule. Fast forward to today. In the Indian context, where inflation is well above the target of 4%, the Taylor Rule would have suggested that MPC raise the policy (repo) rate.

But, this week, MPC opted, instead, to keep the rate unchanged. As expected, the commentariat has promptly come up with various weighty (sic) reasons. But there's a less weighty one.

And don't dismiss it outright. The reason MPC did not raise rates when the Taylor Rule would have suggested as much is, perhaps, because there's a new 'Taylor Rule' in vogue, one that's upstaged the old one. The best part is, it's even simpler — no equations, no splitting hairs about esoteric things like output gap and so on — even though not many economists seem to have cottoned on.