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Using a nominal GDP rule to guide discretionary monetary policy

Author

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  • John P. Judd
  • Brian Motley

Abstract

Given doubts about the reliability of the monetary aggregates as intermediate targets of monetary policy, the Federal Reserve attempts to meet its dual goals--gradual reduction of inflation and mitigation of cyclical downturns in output--through purely discretionary adjustments of an interest rate instrument in response to myriad incoming data. A procedure in which the Fed would consult a nominal GDP feedback rule, while retaining the flexibility to use discretion in its monetary policy decisions, might contribute to achieving its long-run inflation goal without significantly interfering with its ability to pursue its short-run cyclical goal. This paper describes such a policy regime, and presents some empirical evidence pertinent to an assessment of how it might work.

Suggested Citation

  • John P. Judd & Brian Motley, 1993. "Using a nominal GDP rule to guide discretionary monetary policy," Economic Review, Federal Reserve Bank of San Francisco, pages 3-11.
  • Handle: RePEc:fip:fedfer:y:1993:p:3-11:n:3
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    File URL: http://www.frbsf.org/publications/economics/review/1993/93-3_3-11.pdf
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    References listed on IDEAS

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    1. Gregory D. Hess & David H. Small & Flint Brayton, 1993. "Nominal income targeting with the monetary base as instrument: an evaluation of McCallum's rule," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    2. Bruce Kasman, 1993. "A comparison of monetary policy operating procedures in six industrial countries," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    3. Brian Motley, 1993. "Growth and inflation: a cross-country study," Working Papers in Applied Economic Theory 93-11, Federal Reserve Bank of San Francisco.
    4. Barro, Robert J, 1986. "Recent Developments in the Theory of Rules versus Discretion," Economic Journal, Royal Economic Society, vol. 96(380a), pages 23-37, Supplemen.
    5. John P. Judd & Bharat Trehan, 1992. "Money, credit, and M2," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue sep4.
    6. Joseph E. Gagnon & Ralph W. Tryon, 1993. "Price and output stability under alternative monetary policy rules," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    7. Carl E. Walsh, 1985. "Revisions in the "flash" estimates of GNP growth: measurement error or forecast error?," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 5-13.
    8. Bennett T. McCallum, 1989. "Targets, Indicators, and Instruments of Monetary Policy," NBER Working Papers 3047, National Bureau of Economic Research, Inc.
    9. Taylor, John B., 1985. "What would nominal GNP targetting do to the business cycle?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 61-84, January.
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    Citations

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    Cited by:

    1. Fair, Ray C. & Howrey, E. Philip, 1996. "Evaluating alternative monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 173-193, October.
    2. Ray Fair, 2003. "Optimal Control and Stochastic Simulation of Large Nonlinear Models with Rational Expectations," Computational Economics, Springer;Society for Computational Economics, vol. 21(3), pages 245-256, June.
    3. Dueker, Michael & Kim, Gyuhan, 1999. "A monetary policy feedback rule in Korea's fast-growing economy," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(1), pages 19-31, January.
    4. Stark, Tom & Croushore, Dean, 1998. "Evaluating McCallum's Rule When Monetary Policy Matters," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 451-485, July.
    5. Thornton, Saranna Robinson, 2000. "How do broader monetary aggregates and divisia measures of money perform in McCallum's adaptive monetary rule?," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 181-204.
    6. Horrace, William C., 1998. "Submodel estimation of a structural vector error correction model under cointegration," Economics Letters, Elsevier, vol. 59(1), pages 23-29, April.

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