TY  - JOUR
AU  - McCallum,Bennett T.
AU  - Nelson,Edward
TI  - Targeting vs. Instrument Rules for Monetary Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10612
PY  - 2004
Y2  - July 2004
UR  - http://www.nber.org/papers/w10612
L1  - http://www.nber.org/papers/w10612.pdf
N1  - Author contact info:
Bennett T. McCallum
Tepper School of Business, Posner 256
Carnegie Mellon University
Pittsburgh, PA 15213
Tel: 412/268-2347
Fax: 412/268-6830
E-Mail: bm05@andrew.cmu.edu

Edward Nelson
Federal Reserve Board
Mail Stop 76, Monetary Affairs
20th and C Streets, N.W.
Washington, DC 20551
E-Mail: edward.nelson@frb.gov
AB  - Svensson (JEL, 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.
ER  -