This note shows that the Svensson versus McCallum and Nelson controversy battled in the Federal Reserve Bank of St. Loius Review (September/ October 2005) can be mapped into a static version of a New Keynesian macro model that consists of an IS-equation, a Phillips curve and an inflation targeting central bank (e.g., Bofinger, Mayer, Wollmershäuser, (2006); Walsh (2002)). As a contribution to literature we supplement the controversy by a forceful graphical analysis. The general debate centers on the question by which notion monetary policy should be implemented. The two sides have fundamentally opposite views on this issue. Svensson argues for targeting rules as a notion of optimal monetary policy, whereas McCallum and Nelson promote simple instrument rules. In this note we systematically analyze these two categories of monetary policy rules. In particular we show that the rule discussed by McCallum and Nelson (2005) imposes different degrees of variability on the economy compared to a targeting rule when monetary policy falls prey to measurement error. To our opinion the hybrid Taylor rule developed by McCallum and Nelson contradicts the original idea of simple rules as a heuristic for monetary policy making and should be rebutted for practical reasons
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number
585.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.: