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Specification of Policy Rules and Performance Measures in Multicountry Simulation Studies

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  • Bennett T. McCallum

Abstract

Much recent analysis of international monetary and fiscal policy issues, such as the choice of an exchange-rate regime or the design of a policy coordination scheme, has been conducted by stochastic simulations with multicountry econometric models. In these studies, it has become standard practice to consider alternative policy rules of a particular form that calls for departures of a policy instrument, from some “baseline” reference path, that are proportional to deviations of a specified target variable from its own baseline path. The present paper argues, however, that this standard rule form is seriously defective for evaluating such issues because the implied rules (1) often fail to be operational and (2) have associated performance measures that can be misleading in important cases. An example is presented that concerns the international “assignment problem” of optimally pairing instruments with policy objectives.

Suggested Citation

  • Bennett T. McCallum, 1992. "Specification of Policy Rules and Performance Measures in Multicountry Simulation Studies," IMF Working Papers 92/41, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:92/41
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    Cited by:

    1. Athanasios Orphanides, 2000. "Activist stabilization policy and inflation: the Taylor rule in the 1970s," Finance and Economics Discussion Series 2000-13, Board of Governors of the Federal Reserve System (U.S.).
    2. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530 Elsevier.
    3. Alexis Penot, 1998. "La politique monétaire française à travers la règle de Taylor," Revue d'Économie Financière, Programme National Persée, vol. 49(5), pages 135-154.
    4. Mahir Binici & Yin-Wong Cheung, 2011. "Exchange Rate Dynamics under Alternative Optimal Interest Rate Rules," Working Papers 1116, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    5. Ramon Moreno & Gloria Pasadilla & Eli Remolona, 1998. "Asia's financial crisis: lessons and policy responses," Pacific Basin Working Paper Series 98-02, Federal Reserve Bank of San Francisco.
    6. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 605-631, April.
    7. Scheide, Joachim, 1998. "Central banks: No reason to ignore money," Kiel Discussion Papers 316, Kiel Institute for the World Economy (IfW).
    8. Levin, Andrew T., 2005. "Comment on: "Endogenous objectives and the evaluation of targeting rules for monetary policy"," Journal of Monetary Economics, Elsevier, vol. 52(5), pages 913-919, July.

    More about this item

    Keywords

    Exchange rate regimes; Economic models; Fiscal policy; Monetary policy; exchange rate; real exchange rate; inflation; price level;

    JEL classification:

    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications

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