Targeting vs. instrument rules for monetary policy

Bennett McCallum () and Edward Nelson ()

No 2004-011, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Svensson (2003) argues strongly that specific targeting rules*first order optimality conditions for a specific objective function and model*are normatively superior to instrument rules for the conduct of monetary policy. That argument is based largely upon four main objections to the latter plus a claim concerning the relative interest-instrument variability entailed by the two approaches. The present paper considers the four objections in turn, and advances arguments that contradict all of them. Then in the paper*s analytical sections, it is demonstrated that the variability claim is incorrect, for a neo-canonical model and also for a variant with one-period-ahead plans used by Svensson, providing that the same decision-making errors are relevant under the two alternative approaches. Arguments relating to general targeting rules and actual central bank practice are also included.

Keywords: Monetary policy; Banks and banking, Central (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: Written
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Published in Federal Reserve Bank of St. Louis Review, September/October 2005, 87(5), pp. 597-611

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Working Paper: Targeting vs. Instrument Rules for Monetary Policy (2004)
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