Working Paper: NBER ID: w10747
Authors: Lars E.O. Svensson
Abstract: 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.
Keywords: No keywords provided
JEL Codes: E42; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| targeting rules (M38) | better policy outcomes (D78) |
| instrument rules (C26) | volatility (E32) |
| targeting rules (M38) | stabilize monetary policy (E63) |
| instrument rules (C26) | significant volatility in the instrument rate (E43) |
| targeting rules (M38) | enhance monetary policy effectiveness (E52) |