Editing Taylor rule (section)

==Alternative versions==
[[File:Taylor Rule Prescriptions for Fed Funds Rate 2016.png|thumb|350px|right|Effective federal funds rate and prescriptions from alternate versions of the Taylor Rule]]
While the Taylor principle has proven influential, debate remains about what else the rule should incorporate. According to some [[New Keynesian economics|New Keynesian]] macroeconomic models, insofar as the central bank keeps inflation stable, the degree of fluctuation in output will be optimized (economists [[Olivier Blanchard]] and [[Jordi Gali]] call this property the '[[divine coincidence]]'). In this case, the central bank does not need to take fluctuations in the output gap into account when setting interest rates (that is, it may optimally set <math>a_y=0</math>.)

Other economists proposed adding terms to the Taylor rule to take into account financial conditions: for example, the interest rate might be raised when stock prices, housing prices, or interest rate spreads increase. Taylor offered a modified rule in 1999: that specified <math>a_{\pi} = 0.5, a_y \ge 0</math>.