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Federal Reserve Bank of St. Louis
Working Papers
Targeting vs. instrument rules for monetary policy
Bennett T. McCallum
Edward Nelson

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 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.

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Bennett T. McCallum & Edward Nelson, Targeting vs. instrument rules for monetary policy, Federal Reserve Bank of St. Louis, Working Papers 2004-011, 2004.
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Keywords: Monetary policy ; Banks and banking; Central
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