Targeting versus instrument rules for monetary policy

Bennett McCallum and Edward Nelson

Review, 2005, vol. 87, issue Sep, 597-612

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 on 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 decisionmaking errors are relevant under the two alternative approaches. Arguments relating to general targeting rules and actual central bank practice are also included.

Keywords: Banks and banking, Central; Monetary policy (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (53)

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Journal Article: Targeting versus instrument rules for monetary policy (2005)
Working Paper: Targeting vs. instrument rules for monetary policy (2004)
Working Paper: Targeting vs. Instrument Rules for Monetary Policy (2004)
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