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Federal Reserve Bank of St. Louis
Review
Targeting versus instrument rules for monetary policy
Bennett T. McCallum
Edward Nelson
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.


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Bennett T. McCallum & Edward Nelson, "Targeting versus instrument rules for monetary policy" , Federal Reserve Bank of St. Louis, Review, issue Sep, pages 597-612, 2005.
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Keywords: Monetary policy ; Banks and banking; Central
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