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Performance of Operational Policy Rules in an Estimated Semi-Classical Structural Model

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  • Bennett T. McCallum
  • Edward Nelson

Abstract

This paper reports results of simulation exercises that explore several questions relating to the design of rules for monetary policy. Emphasis is given to issues raised by the concept of rule operationality, i.e., reliance on feasible instrument variables and information sets. Many of the results pertain to rules of the Taylor type -- i.e., with an interest rate instrument set in response to inflation and output-gap measures -- but some are reported for rules using a nominal income target and/or a monetary base instrument. The macroeconomic model utilized is small in scale but features a specification designed to represent rational dynamic optimizing choices by the economy's private agents. Saving and portfolio-balance behavior are expressed by optimizing versions of exceptional IS and LM functions, with gradual price adjustments specified differently in two variants of the model. One variant uses the well-known Calvo-Rotemberg price adjustment relation, whereas the second employs a newly-rationalized version of the Mussa-McCallum-Barro-Grossman P-bar model. Parameter values are estimated by instrumental variables on U.S. quarterly data for 1995-1996.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6599.

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Date of creation: Jun 1998
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Publication status: published as Proceedings, Federal Reserve Bank of San Francisco, March 1998
Handle: RePEc:nbr:nberwo:6599

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  1. Svensson, L-E-O, 1997. "Inflation Targeting : Some Extensions," Papers, Stockholm - International Economic Studies 625, Stockholm - International Economic Studies.
  2. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530 Elsevier.
  3. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 115(1), pages 147-180, February.
  4. Brunner, Karl & Meltzer, Allan H., 1983. "Strategies and tactics for monetary control," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 18(1), pages 59-103, January.
  5. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.).
  6. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  7. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
  8. Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers, Stockholm University, Institute for International Economic Studies 615, Stockholm University, Institute for International Economic Studies.
  9. Ireland, Peter N., 1997. "A small, structural, quarterly model for monetary policy evaluation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 47(1), pages 83-108, December.
  10. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(2-3), pages 345-370, April.
  11. McCallum, Bennett T., 1994. "A semi-classical model of price-level adjustment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 41(1), pages 251-284, December.
  12. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 14(1), pages 98-118, February.
  13. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  14. Bennett T. McCallum & Edward Nelson, 1997. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc.
  15. Robert E. Hall, 1979. "Labor Supply and Aggregate Fluctuations," NBER Working Papers 0385, National Bureau of Economic Research, Inc.
  16. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 1-23, February.
  17. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September.
  18. Bennett T. McCallum, 1989. "Targets, Indicators, and Instruments of Monetary Policy," NBER Working Papers 3047, National Bureau of Economic Research, Inc.
  19. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Spr, pages 47-75.
  20. Goodhart, Charles A E, 1994. "What Should Central Banks Do? What Should Be Their Macroeconomic Objectives and Operations?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 104(427), pages 1424-36, November.
  21. Ball, Laurence, 1994. "Credible Disinflation with Staggered Price-Setting," American Economic Review, American Economic Association, American Economic Association, vol. 84(1), pages 282-89, March.
  22. Nelson, E., 1998. "Sluggish inflation and optimizing models of the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 42(2), pages 303-322, July.
  23. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  24. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 29(1), pages 173-203, January.
  25. Bennett T. McCallum, 1993. "Specification and Analysis of a Monetary Policy Rule for Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 11(2), pages 1-45, December.
  26. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, Elsevier, vol. 11(2), pages 139-168.
  27. Robert Ingenito & Bharat Trehan, 1996. "Using monthly data to predict quarterly output," Economic Review, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, pages 3-11.
  28. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  29. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
  30. Bennett T. McCallum, 1994. "Monetary Policy Rules and Financial Stability," NBER Working Papers 4692, National Bureau of Economic Research, Inc.
  31. Julio Rotemberg, 1987. "The New Keynesian Microfoundations," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 69-116 National Bureau of Economic Research, Inc.
  32. repec:fth:harver:1435 is not listed on IDEAS
  33. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  34. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
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