Racial disparities and monetary policy: Evidence from augmented Taylor rules

This paper examines whether extending the Taylor rule to incorporate racial unemployment disparities enhances its explanatory power for U.S. monetary policy from 1975 to 2007. Using quarterly data on federal funds rates, inflation, and unemployment rates by race, the analysis contrasts traditional Taylor rule specifications with models that include Black/White and Black/Overall unemployment ratios and gaps. The results demonstrate that accounting for racial disparities improves the fit of the model and the explanatory power, suggesting that racial unemployment gaps may serve as useful information variables that help the Fed assess overall labor market slack. • Taylor rule specifications that incorporate racial unemployment disparity measures provide a significantly better fit for Federal Reserve policy decisions (1975–2007) than traditional aggregate-gap rules. • The augmented Taylor rules improved key fit statistics: the adjusted R2, and the Root Mean Squared Error (RMSE), confirming the genuine information content of the disparity measures. • The improved fit suggests that racial unemployment gaps serve as valuable “information variables,” not policy targets.