IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this book chapter or follow this series

Issues in the design of monetary policy rules

In: Handbook of Macroeconomics

  • McCallum, Bennett T.

This chapter begins with a number of important preliminary issues including the distinction between rules and discretion in monetary policy; the feasibility of committed rule-like behavior by an independent central bank; and optimal control vs. robustness strategies for conducting research. It then takes up the choice among alternative target variables -- with the most prominent contenders including price level, nominal income, and hybrid (inflation plus output gap) variables -- together with the issue of growth-rate vs. growing-level target path specifications. One conclusion is that inflation and nominal income growth targets, but not the hybrid target, would have induced fairly similar policy responses in the US economy over 1960-1995. With regard to instrument choice, the chapter argues that both nominal interest rate and monetary base measures are feasible; this discussion emphasizes the basic conceptual distinction between nominal indeterminacy and solution multiplicity. Accordingly, root-mean-square-error performance measures are estimated for interest rate and base instruments (with nominal income target) in the context of a VAR model. Other topics emphasized in the chapter include the operationality of policy-rule specifications; stochastic vs. historical simulation procedures; interactions between monetary and fiscal policies; and the recently-developed fiscal theory of the price level.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/B7P5X-4FPWV0F-8/2/36e446e64a403a6b421e12e9dcaef8b0
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

as
in new window

This chapter was published in:
  • J. B. Taylor & M. Woodford (ed.), 1999. "Handbook of Macroeconomics," Handbook of Macroeconomics, Elsevier, edition 1, volume 1, number 1.
  • This item is provided by Elsevier in its series Handbook of Macroeconomics with number 1-23.
    Handle: RePEc:eee:macchp:1-23
    Contact details of provider: Web page: http://www.elsevier.com/wps/find/bookseriesdescription.cws_home/BS_HE/description

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Ray C. Fair & E. Philip Howrey, 1995. "Evaluating Alternative Monetary Policy Rules," Cowles Foundation Discussion Papers 1091, Cowles Foundation for Research in Economics, Yale University.
    2. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
    3. Laurence Ball, 1997. "Efficient rules for monetary policy," Reserve Bank of New Zealand Discussion Paper Series G97/3, Reserve Bank of New Zealand.
    4. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
    5. West, Kenneth D, 1986. "Targeting Nominal Income: A Note," Economic Journal, Royal Economic Society, vol. 96(384), pages 1077-83, December.
    6. Svensson, Lars E.O., 1997. "Inflation Targeting: Some Extensions," Seminar Papers 625, Stockholm University, Institute for International Economic Studies.
    7. Tobin, James, 1985. "On Consequences and Criticisms of Monetary Targeting, or Monetary Targeting: Dead at Last? Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 605-09, November.
    8. Axilrod, Stephen H, 1985. "On Consequences and Criticisms of Monetary Targeting: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 598-602, November.
    9. Maurice Obstfeld & Kenneth Rogoff, 1981. "Speculative hyperinflations in a maximizing models: can we rule them out?," International Finance Discussion Papers 195, Board of Governors of the Federal Reserve System (U.S.).
    10. Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
    11. Michael Dotsey, 1996. "Some not-so-unpleasant monetarist arithmetic," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 73-91.
    12. Bennett T. McCallum, 1996. "Crucial Issues Concerning Central Bank Independence," NBER Working Papers 5597, National Bureau of Economic Research, Inc.
    13. McCallum, Bennett T, 1985. "On Consequences and Criticisms of Monetary Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 570-97, November.
    14. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
    15. Sargent, Thomas J & Wallace, Neil, 1973. "The Stability of Models of Money and Growth with Perfect Foresight," Econometrica, Econometric Society, vol. 41(6), pages 1043-48, November.
    16. 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.
    17. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
    18. Peter N. Ireland, 1998. "Alternative Nominal Anchors," Canadian Journal of Economics, Canadian Economics Association, vol. 31(2), pages 365-384, May.
    19. J. Whittaker & A. J. Theunissen, 1987. "Why does the Reserve Bank Set the Interest Rate?," South African Journal of Economics, Economic Society of South Africa, vol. 55(1), pages 9-20, 03.
    20. Laidler, D., 1996. "American macroeconomics Between World War I and the Depression," UWO Department of Economics Working Papers 9606, University of Western Ontario, Department of Economics.
    21. Marvin Goodfriend, 1987. "Interest rate smoothing and price level trend-stationarity," Working Paper 87-03, Federal Reserve Bank of Richmond.
    22. Aizenman, Joshua & Frenkel, Jacob A., 1986. "Targeting rules for monetary policy," Economics Letters, Elsevier, vol. 21(2), pages 183-187.
    23. Dueker, Michael & Fischer, Andreas M., 1996. "Inflation targeting in a small open economy: Empirical results for Switzerland," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 89-103, February.
    24. Jean-Pascal Benassy, 2000. "Price Level Determinacy under a Pure Interest Rate Peg," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 194-211, January.
    25. Cogley, Timothy & Nason, James M., 1995. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series Implications for business cycle research," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 253-278.
    26. Woglom, Geoffrey, 1980. "Rational expectations and economic policy : Stanley Fischer, ed., (University of Chicago Press, Chicago, 1980) pp. ix+293, $22.00," Journal of Monetary Economics, Elsevier, vol. 6(4), pages 587-589, October.
    27. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
    28. Bennett T. McCallum, 1980. "Price Level Determinacy with an Interest Rate Policy Rule and Rational Expectations," NBER Working Papers 0559, National Bureau of Economic Research, Inc.
    29. Bennett T. McCallum, 1989. "Could A Monetary Base Rule Have Prevented the Great Depression?," NBER Working Papers 3162, National Bureau of Economic Research, Inc.
    30. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
    31. Cook, Timothy & Hahn, Thomas, 1989. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 331-351, November.
    32. Poole, William, 1991. "Interest rates and the conduct of monetary policy : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 31-39, January.
    33. Svensson, Lars E.O., 1997. "Price Level Targeting vs. Inflation Targeting: A Free Lunch?," Seminar Papers 614, Stockholm University, Institute for International Economic Studies.
    34. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
    35. Black, Fischer, 1974. "Uniqueness of the price level in monetary growth models with rational expectations," Journal of Economic Theory, Elsevier, vol. 7(1), pages 53-65, January.
    36. Bean, Charles R, 1983. "Targeting Nominal Income: An Appraisal," Economic Journal, Royal Economic Society, vol. 93(372), pages 806-19, December.
    37. Canzoneri, Matthew B & Henderson, Dale W & Rogoff, Kenneth S, 1983. "The Information Content of the Interest Rate and Optimal Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 545-66, November.
    38. Frankel, Jeffrey, 1995. "The Stabilizing Properties of a Nominal GNP Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 318-34, May.
    39. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    40. Michael J. Dueker, 1993. "Can nominal GDP targeting rules stabilize the economy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 15-29.
    41. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, vol. 1(2), pages 133-150, April.
    42. 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.).
    43. Jonung, Lars, 1979. "Knut wicksell's norm of price stabilization and Swedish monetary policy in the 1930's," Journal of Monetary Economics, Elsevier, vol. 5(4), pages 459-496, October.
    44. Poole, William, 1985. "On Consequences and Criticisms of Monetary Targeting: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 602-05, November.
    45. Georg Rich, 1987. "Swiss and United States monetary policy: has monetarism failed?," Economic Review, Federal Reserve Bank of Richmond, issue May, pages 3-16.
    46. Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1212-36, December.
    47. Brayton, Flint & Levin, Andrew & Lyon, Ralph & Williams, John C., 1997. "The evolution of macro models at the Federal Reserve Board," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47(1), pages 43-81, December.
    48. Wicksell, Knut, 1907. "The Influence of the Rate of Interest on Prices," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 17, pages 213-220.
    49. 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.
    50. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    51. Richard D. Porter & Ruth A. Judson, 1996. "The location of U.S. currency: how much is abroad?," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 883-903.
    52. Parkin, Michael, 1978. "A Comparison of Alternative Techniques of Monetary Control under Rational Expectations," The Manchester School of Economic & Social Studies, University of Manchester, vol. 46(3), pages 252-87, September.
    53. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
    54. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 85-101, Spring.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:macchp:1-23. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.