“Interest rates should rise to two to three percent”

Berlin Monetary policy is perhaps the most complex discipline in economics. In 1993, however, the US economist John B. Taylor achieved the seemingly impossible: he reduced the fight against inflation to a single formula. The Taylor rule derives the optimal key interest rate from the deviation from the optimum for inflation and economic output.

Many central banks rely on this formula. However, with the beginning of the unconventional monetary policy in the years after the global financial crisis, the central bank bosses listened less and less to the Stanford scientist.

Now inflation is back – and with it the Taylor rule. Before the Council meeting of the European Central Bank (ECB) on Thursday, the formula signals that a fundamental change of course in monetary policy would be advisable, as its inventor explains in an interview with the Handelsblatt: He calls for interest rate increases of “two to three percent”.