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Specification of Policy Rules and Performance Measures in Multicountry Simulation Studies

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  • Bennett T. McCallum

Abstract

Much recent analysis of international monetary and fiscal policy issues, such as the choice of an exchange-rate regime or the design of a policy coordination scheme, has been conducted by stochastic simulations with multicountry econometric models. In these studies, it has become standard practice to consider alternative policy rules of a particular form that calls for departures of a policy instrument, from some “baseline” reference path, that are proportional to deviations of a specified target variable from its own baseline path. The present paper argues, however, that this standard rule form is seriously defective for evaluating such issues because the implied rules (1) often fail to be operational and (2) have associated performance measures that can be misleading in important cases. An example is presented that concerns the international “assignment problem” of optimally pairing instruments with policy objectives.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 92/41.

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Length: 24
Date of creation: 01 Jun 1992
Date of revision:
Handle: RePEc:imf:imfwpa:92/41

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Keywords: Exchange rate regimes; Economic models; exchange rate; monetary policy; real exchange rate; inflation; price level; nominal interest rate; exchange rates; monetary base; exchange rate targets; foreign exchange; real interest rate; aggregate demand; inflation rate; rational expectations; flexible exchange rates; annual inflation; percent annual inflation; annual inflation rate; current account balance; real output; exchange rate regime; control of inflation; exchange rate deviations; monetary economics; exchange rate management; nominal interest rates; foreign exchange market; money growth; exchange rate system; exchange arrangements;

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Cited by:
  1. Scheide, Joachim, 1998. "Central banks: no reason to ignore money," Kiel Discussion Papers 316, Kiel Institute for the World Economy (IfW).
  2. Alexis Penot, 1998. "La politique monétaire française à travers la règle de Taylor," Revue d'Économie Financière, Programme National Persée, vol. 49(5), pages 135-154.
  3. Moreno, R. & Pasadilla, G. & Remolona, E., 1998. "Asia's Financial Crisis: Lessons and Policy Responses," Papers 98-02, Economisch Institut voor het Midden en Kleinbedrijf-.
  4. Orphanides, Athanasios, 2002. "Activist stabilization policy and inflation: The Taylor rule in the 1970s," CFS Working Paper Series 2002/15, Center for Financial Studies (CFS).
  5. Mahir Binici & Yin-Wong Cheung, 2011. "Exchange Rate Dynamics Under Alternative Optimal Interest Rate Rules," Working Papers 362011, Hong Kong Institute for Monetary Research.
  6. Athanasios Orphanides, 1998. "Monetary policy evaluation with noisy information," Finance and Economics Discussion Series 1998-50, Board of Governors of the Federal Reserve System (U.S.).

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