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Evaluating McCallum's rule when monetary policy matters

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  • Dean Croushore
  • Tom Stark

Abstract

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.

Suggested Citation

  • Dean Croushore & Tom Stark, 1996. "Evaluating McCallum's rule when monetary policy matters," Working Papers 96-3, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:96-3
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    References listed on IDEAS

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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, vol. 73(Sep), pages 10-18.
    3. 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.
    4. John P. Judd & Brian Motley, 1992. "Controlling inflation with an interest rate instrument," Economic Review, Federal Reserve Bank of San Francisco, pages 3-22.
    5. 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.
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    7. Herbert E. Taylor, 1992. "PSTAR+: a small macro model for policymakers," Working Papers 92-26, Federal Reserve Bank of Philadelphia.
    8. 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.
    9. Bennett T. McCallum, 1995. "Monetary Policy Rules and Financial Stability," Palgrave Macmillan Books, in: Kuniho Sawamoto & Zenta Nakajima & Hiroo Taguchi (ed.), Financial Stability in a Changing Environment, chapter 9, pages 389-438, Palgrave Macmillan.
    10. Flint Brayton & Gregory D. Hess & David H. Small, 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.).
    11. 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.
    12. 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.
    13. 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.
    14. 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.
    15. Benjamin M. Friedman, 1984. "The Value of Intermediate Targets in Implementing Monetary Policy," NBER Working Papers 1487, National Bureau of Economic Research, Inc.
    16. 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.
    17. 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.
    18. Jordi Galí, 1992. "How Well Does The IS-LM Model Fit Postwar U. S. Data?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 709-738.
    19. Robert D. Laurent, 1988. "An interest rate-based indicator of monetary policy," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 12(Jan), pages 3-14.
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    Cited by:

    1. Jung, Alexander, 2018. "Does McCallum’s rule outperform Taylor’s rule during the financial crisis?," The Quarterly Review of Economics and Finance, Elsevier, vol. 69(C), pages 9-21.
    2. Stark, Tom & Croushore, Dean, 1998. "Evaluating McCallum's Rule When Monetary Policy Matters," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 451-485, July.
    3. Muneesh Kapur & Michael Debabrata Patra, 2012. "Alternative Monetary Policy Rules for India," IMF Working Papers 2012/118, International Monetary Fund.

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    Keywords

    Gross domestic product; Monetary policy;

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