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Evaluating McCallum's rule when monetary policy matters

  • 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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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
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Handle: RePEc:fip:fedpwp:96-3
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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. Bennett T. McCallum, 1993. "Specification and Analysis of a Monetary Policy Rule for Japan," NBER Working Papers 4449, National Bureau of Economic Research, Inc.
  3. 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 507-16, May.
  4. 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.
  5. Robert D. Laurent, 1988. "An interest rate-based indicator of monetary policy," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 3-14.
  6. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September.
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