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September/October 2005, 
Vol. 87, No. 5
Posted 2005-09-01

Targeting versus Instrument Rules for Monetary Policy: What is Wrong with McCallum and Nelson?

by Lars E.O. Svensson

McCallum and Nelson’s critique of targeting rules for monetary policy are rebutted. Their preference to study the robustness of simple monetary policy rules is no reason to limit attention to simple instrument rules; simple targeting rules may be more desirable. 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. Under realistic assumptions, the instrument rule analog to any targeting rule the authors propose results in very large instrument rate volatility and is, for other reasons, inferior.

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