Alternative Versions of The Rule
While the Taylor principle has proved very influential, there is more debate about the other terms that should enter into the rule. According to some simple New Keynesian macroeconomic models, insofar as the central bank keeps inflation stable, the degree of fluctuation in output will be optimized (Blanchard and Gali call this property the 'divine coincidence'). In this case, the central bank need not take fluctuations in the output gap into account when setting interest rates (that is, it may optimally set .) On the other hand, other economists have proposed including additional terms in 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.
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