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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. McCallum, Bennett T & Nelson, Edward, 1999. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 296-316, August.
  2. Svensson, L-E-O, 1996. "Inflation Forecast Targeting : Implementaing and Monitoring Inflation Targets," Papers 615, Stockholm - International Economic Studies.
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  4. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
  5. 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.
  6. Svensson, Lars E O, 1999. " Inflation Targeting: Some Extensions," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(3), pages 337-61, September.
  7. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  8. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  9. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  10. 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, vol. 11(2), pages 1-45, December.
  11. McCallum, Bennett T., 1994. "A semi-classical model of price-level adjustment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 251-284, December.
  12. Nelson, E., 1998. "Sluggish inflation and optimizing models of the business cycle," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 303-322, July.
  13. Bennett T. McCallum, 1994. "Monetary Policy Rules and Financial Stability," NBER Working Papers 4692, National Bureau of Economic Research, Inc.
  14. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September.
  15. Robert E. Hall, 1979. "Labor Supply and Aggregate Fluctuations," NBER Working Papers 0385, National Bureau of Economic Research, Inc.
  16. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
  17. Bennett T. McCallum, 1989. "Targets, Indicators, and Instruments of Monetary Policy," NBER Working Papers 3047, National Bureau of Economic Research, Inc.
  18. Julio J. Rotemberg & Michael Woodford, 1998. "Interest-Rate Rules in an Estimated Sticky Price Model," NBER Working Papers 6618, National Bureau of Economic Research, Inc.
  19. Goodhart, Charles A E, 1994. "What Should Central Banks Do? What Should Be Their Macroeconomic Objectives and Operations?," Economic Journal, Royal Economic Society, vol. 104(427), pages 1424-36, November.
  20. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  21. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530 Elsevier.
  22. 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.
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  30. Brunner, Karl & Meltzer, Allan H., 1983. "Strategies and tactics for monetary control," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 18(1), pages 59-103, January.
  31. Ireland, Peter N., 1997. "A small, structural, quarterly model for monetary policy evaluation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 83-108, December.
  32. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January.
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