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Evaluating McCallum's rule when monetary policy matters

Listed author(s):
  • Dean Croushore
  • Tom Stark

This paper provides new evidence on the usefulness of McCallum's proposed rule for monetary policy. The rule targets nominal GDP using the monetary base as the instrument. We analyze the rule using three very different economic models to see if the rule works well in different environments. Our results suggest that while the rule leads to lower inflation than there has been over the last 30 years, instability problems suggest that the rule should be modified to feed back on the growth rate of nominal GDP rather than the level.

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File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/1996/wp96-3.pdf
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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 96-3.

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Date of creation: 1996
Handle: RePEc:fip:fedpwp:96-3
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  1. Stark, Tom & Croushore, Dean, 1998. "Evaluating McCallum's Rule When Monetary Policy Matters," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 451-485, July.
  2. Bennett T. McCallum, 1987. "The case for rules in the conduct of monetary policy: a concrete example," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 10-18.
  3. Bennett T. McCallum, 1993. ""Specification and Analysis of a Monetary Policy Rule for Japan" Reply to Comments by Kunio Okina," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 11(2), pages 55-57, December.
  4. 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.
  5. McCallum, Bennett T., 1990. "Could a monetary base rule have prevented the great depression?," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 3-26, August.
  6. John P. Judd & Brian Motley, 1991. "Nominal feedback rules for monetary policy," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 3-17.
  7. John P. Judd & Brian Motley, 1992. "Controlling inflation with an interest rate instrument," Economic Review, Federal Reserve Bank of San Francisco, pages 3-22.
  8. Fair, Ray C, 1970. "The Estimation of Simultaneous Equation Models with Lagged Endogenous Variables and First Order Serially Correlated Errors," Econometrica, Econometric Society, vol. 38(3), pages 507-516, May.
  9. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-1286, September.
  10. Herbert E. Taylor, 1992. "PSTAR+: a small macro model for policymakers," Working Papers 92-26, Federal Reserve Bank of Philadelphia.
  11. 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.
  12. Benjamin M. Friedman, 1977. "The Inefficiency of Short-Run Monetary Targets for Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(2), pages 293-346.
  13. 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.
  14. 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.).
  15. Jordi GalĂ­, 1992. "How Well Does The IS-LM Model Fit Postwar U. S. Data?," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 709-738.
  16. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-858, September.
  17. Robert D. Laurent, 1988. "An interest rate-based indicator of monetary policy," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 3-14.
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