Targeting Rules vs. Instrument Rules for Monetary Policy: What is Wrong with McCallum and Nelson? / Lars E.O. Svensson.

Format:

Book

Author/Creator:

Svensson, Lars E.O.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w10747.

NBER working paper series no. w10747

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Targeting Rules vs. Instrument Rules for Monetary Policy

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2004.

Summary:

McCallum and Nelson's (2004) criticism of targeting rules for the analysis of monetary policy is rebutted. First, McCallum and Nelson's preference to study the robustness of simple monetary-policy rules is no reason at all to limit attention to simple instrument rules; simple targeting rules may have more desirable properties. Second, optimal targeting rules are a compact, robust, and structural description of goal-directed monetary policy, analogous to the compact, robust, and structural consumption Euler conditions in the theory of consumption. They express the very robust condition of equality of the marginal rates of substitution and transformation between the central bank's target variables. Third, under realistic information assumptions, the instrument-rule analogue to any targeting rule that McCallum and Nelson have proposed results in very large instrument-rate volatility and is also for other reasons inferior to a targeting rule.

Notes:

Print version record

September 2004.