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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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File URL: http://www.nber.org/papers/w7725.pdf
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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
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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. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
  2. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  3. Bennett T. McCallum & Edward Nelson, 2000. "Nominal Income Targeting in an Open-Economy Optimizing Model," NBER Working Papers 6675, National Bureau of Economic Research, Inc.
  4. 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.
  5. Bennett T. McCallum & Edward Nelson, . "Performance of Operational Policy Rules in an Estimated Semi-Classical Structural Model," GSIA Working Papers 1998-22, Carnegie Mellon University, Tepper School of Business.
  6. 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.
  7. 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.
  8. 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.
  9. Robert E. Hall & N. Gregory Mankiw, 1994. "Nominal Income Targeting," NBER Chapters, in: Monetary Policy, pages 71-94 National Bureau of Economic Research, Inc.
  10. 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.
  11. Clarida, Richard & GalĂ­, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
  12. 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.
  13. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, October.
  14. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
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