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Targeting Rules vs. Instrument Rules for Monetary Policy: What is Wrong with McCallum and Nelson?

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  • Lars E.O. Svensson

Abstract

McCallum and Nelson's (2004) criticism of targeting rules for the analysis of monetary policy is rebutted. 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. Third, under realistic information assumptions, the instrument-rule analogue 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10747.

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Date of creation: Sep 2004
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Publication status: published as Svensson, Lars E. O. "Targeting Rules Versus Instrument Rules For Monetary Policy: What Is Wrong With McCallum And Nelson?," Federal Reserve Bank of St. Louis Review 87(5): 613-625, Sep/Oct 2005
Handle: RePEc:nbr:nberwo:10747

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Citations

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Cited by:
  1. Svensson, Lars E. O., 2005. "Monetary policy with judgment: forecast targeting," Working Paper Series 0476, European Central Bank.
  2. Gianluca Benigno & Pierpaolo Benigno, 2004. "Designing Target Rules for International Monetary Policy Cooperation," CEP Discussion Papers dp0666, Centre for Economic Performance, LSE.
  3. Walsh, Carl E., 2005. "Endogenous objectives and the evaluation of targeting rules for monetary policy," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 889-911, July.
  4. James Bullard & Eric Schaling, 2009. "Monetary Policy, Determinacy, and Learnability in a Two-Block World Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1585-1612, December.
  5. Dumitru, Ionut, 2006. "Tintirea directa a inflatiei in Romania – provocari si perspective
    [Inflation targeting in Romania - challenges and perspectives]
    ," MPRA Paper 10570, University Library of Munich, Germany.
  6. Kenneth N Kuttner, 2004. "A Snapshot of Inflation Targeting in its Adolescence," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.

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