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The case for rules in the conduct of monetary policy: a concrete example

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  • Bennett T. McCallum

Abstract

A policy rule can be activist; the distinction between rules and discretion depends on the stage at which optimization calculations enter the policy process. Here a specific monetary rule is proposed, one that sets the monetary base each quarter in a manner designed to keep nominal aggregate demand growing smoothly at a noninflationary rate. Simulations with a simple estimated model suggest that the proposed rule would have performed well over the period 1954-85, despite financial innovations and regulatory change.

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File URL: http://www.richmondfed.org/publications/research/economic_review/1987/pdf/er730502.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of Richmond in its journal Economic Review.

Volume (Year): (1987)
Issue (Month): Sep ()
Pages: 10-18

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Handle: RePEc:fip:fedrer:y:1987:i:sep:p:10-18:n:v.73no.5

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Keywords: Monetary policy ; Inflation (Finance) ; Monetary theory;

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  1. Barro, Robert J, 1986. "Recent Developments in the Theory of Rules versus Discretion," Economic Journal, Royal Economic Society, vol. 96(380a), pages 23-37, Supplemen.
  2. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  3. J.-P. Fitoussi & E. S. Phelps, 1986. "Causes of the 1980s Slump in Europe," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 487-520.
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