Editing Taylor rule (section)

==Principle==
By specifying <math>a_{\pi}>0</math>, the Taylor rule says that an increase in inflation by one percentage point should prompt the [[central bank]] to raise the [[nominal interest rate]] by more than one percentage point (specifically, by <math>1+a_{\pi}</math>, the sum of the two coefficients on <math>\pi_t</math> in the equation). Since the [[real interest rate]] is (approximately) the nominal interest rate minus inflation, stipulating <math>a_{\pi}>0</math> implies that when inflation rises, the [[real interest rate]] should be increased.  The idea that the nominal interest rate should be raised "more than one-for-one" to cool the economy when inflation increases (that is increasing the real interest rate) has been called the Taylor principle. The Taylor principle presumes a unique bounded [[Economic equilibrium|equilibrium]] for inflation. If the Taylor principle is violated, then the inflation path may be unstable.<ref>{{cite journal |title=Generalizing the Taylor Principle |first1=Troy |last1=Davig |first2=Eric M. |last2=Leeper |journal=[[American Economic Review]] |volume=97 |issue=3 |year=2007 |pages=607–635 |jstor=30035014 |doi=10.1257/aer.97.3.607|url=https://caepr.indiana.edu/RePEc/inu/caeprp/CAEPR2006-001.pdf }}</ref>