Issues in the design of monetary policy rules

Bennett McCallum

Chapter 23 in Handbook of Macroeconomics, 1999, vol. 1, Part C, pp 1483-1530 from Elsevier

Abstract: This chapter begins with a number of important preliminary issues including the distinction between rules and discretion in monetary policy; the feasibility of committed rule-like behavior by an independent central bank; and optimal control vs. robustness strategies for conducting research. It then takes up the choice among alternative target variables -- with the most prominent contenders including price level, nominal income, and hybrid (inflation plus output gap) variables -- together with the issue of growth-rate vs. growing-level target path specifications. One conclusion is that inflation and nominal income growth targets, but not the hybrid target, would have induced fairly similar policy responses in the US economy over 1960-1995. With regard to instrument choice, the chapter argues that both nominal interest rate and monetary base measures are feasible; this discussion emphasizes the basic conceptual distinction between nominal indeterminacy and solution multiplicity. Accordingly, root-mean-square-error performance measures are estimated for interest rate and base instruments (with nominal income target) in the context of a VAR model. Other topics emphasized in the chapter include the operationality of policy-rule specifications; stochastic vs. historical simulation procedures; interactions between monetary and fiscal policies; and the recently-developed fiscal theory of the price level.

JEL-codes: E0 (search for similar items in EconPapers)
Date: 1999
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Citations: View citations in EconPapers (340)

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Working Paper: Issues in the Design of Monetary Policy Rules (1997)
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