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Targeting versus instrument rules for monetary policy: what is wrong with McCallum and Nelson?

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Author Info

  • Lars E.O. Svensson

Abstract

In their paper "Targeting versus Instrument Rules for Monetary Policy," McCallum and Nelson critique targeting rules for the analysis of monetary policy. Their arguments are rebutted here. First, McCallum and Nelson's preference to study the robustness of simple monetary policy rules is no reason at all to limit attention to simple instrument rules; simple targeting rules may have more desirable properties. Second, optimal targeting rules are a compact, robust, and structural description of goal-directed monetary policy, analogous to the compact, robust, and structural consumption Euler conditions in the theory of consumption. They express the very robust condition of equality of the marginal rates of substitution and transformation between the central bank's target variables. Indeed, they provide desirable micro foundations of monetary policy. Third, under realistic information assumptions, the instrument rule analog to any targeting rule that McCallum and Nelson have proposed results in very large instrument rate volatility and is also, for other reasons, inferior to a targeting rule.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2005)
Issue (Month): Sep ()
Pages: 613-626

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Handle: RePEc:fip:fedlrv:y:2005:i:sep:p:613-626:n:v.87no.5

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Keywords: Monetary policy;

References

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  1. McCallum, Bennett T & Nelson, Edward, 2001. "Timeless Perspective Vs Discretionary Monetary Policy in Forward-Looking Models," CEPR Discussion Papers 2752, C.E.P.R. Discussion Papers.
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  3. Svensson, Lars E O, 2002. "The Inflation Forecast and the Loss Function," CEPR Discussion Papers 3365, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. James B. Bullard & Eric Schaling, 2006. "Monetary policy, determinacy, and learnability in a two-block world economy," Working Papers 2006-038, Federal Reserve Bank of St. Louis.
  2. Blake, Andrew P., 2012. "Determining optimal monetary speed limits," Economics Letters, Elsevier, vol. 116(2), pages 269-271.
  3. Miguel Casares, 2006. "A close look at model-dependent monetary policy design," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 451-470.
  4. Aleksandra Maslowska, 2009. "Using Taylor Rule to Explain Effects of Institutional Changes in Central Banks," Discussion Papers 46, Aboa Centre for Economics.
  5. Ara Stepanyan & Era Dabla-Norris & Ashot Anatolii Mkrtchyan, 2009. "A New Keynesian Model of the Armenian Economy," IMF Working Papers 09/66, International Monetary Fund.
  6. Lucjan T. Orlowski & Kirsten Lommatzsch, 2005. "Bond Yield Compression in the Countries Converging to the Euro," William Davidson Institute Working Papers Series wp799, William Davidson Institute at the University of Michigan.

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