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Alternative Monetary Policy Rules: A Comparison with Historical Settings for the United States, the United Kingdom, and Japan

  • Bennett T. McCallum

This paper conducts counterfactual historical analysis of several monetary policy rules by contrasting actual settings of instrument variables with values that would have been specified by the rules in response to prevailing conditions. Of particular interest is whether major policy mistakes, judged ex post, would have been prevented by candidate rules. The rules studied include those of Taylor and McCallum, previously considered by Alison Stuart, plus several additional combinations of instrument and target variables. The time spans examined are 1962-1998 for the U.S. and U.K., and 1972-1998 for Japan. In addition to various substantive findings, the paper develops several methodological arguments. A surprising result is that rules' messages are evidently more dependent upon the specification of their instrument than their target variable.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7725.

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Date of creation: Jun 2000
Date of revision:
Publication status: published as Economic Quarterly - Federal Reserve Bank of Richmond, Vol. 86/1 (Winter 2000): pp. 49-79
Handle: RePEc:nbr:nberwo:7725
Note: EFG ME
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  1. Bennett T. McCallum & Edward Nelson, 1998. "Performance of Operational Policy Rules in an Estimated Semi-Classical Structural Model," NBER Working Papers 6599, National Bureau of Economic Research, Inc.
  2. Svensson, Lars E O, 1998. "Inflation Targeting as a Monetary Policy Rule," CEPR Discussion Papers 1998, C.E.P.R. Discussion Papers.
  3. McCallum, B.T. & Nelson, E., 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Papers 644, Stockholm - International Economic Studies.
  4. Robert E. Hall & N. Gregory Mankiw, 1994. "Nominal Income Targeting," NBER Chapters, in: Monetary Policy, pages 71-94 National Bureau of Economic Research, Inc.
  5. 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.
  6. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
  7. Sharon Kozicki, 1999. "How useful are Taylor rules for monetary policy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-33.
  8. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," Working Papers 97-32, C.V. Starr Center for Applied Economics, New York University.
  10. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  11. 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.
  12. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  13. Meltzer, Allan H, 1987. "Limits of Short-run Stabilization Policy: Presidential Address to the Western Economic Association, July 3, 1986," Economic Inquiry, Western Economic Association International, vol. 25(1), pages 1-14, January.
  14. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, December.
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