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Abstract:
The fiscal theory of the price level (FTPL) has attracted much attention but disagreement remains concerning its defining characteristics. Some writers have emphasized implications regarding interest-rate pegging and determinacy of rational expectations solutions, whereas others have stressed its capacity to generate equilibria in which price-level trajectories mimic those of bonds and differ drastically from those of money supplies. We argue that the FTPL attained prominence precisely because it appeared to provide a theory whose implications differ greatly from conventional monetary analysis; accordingly we review monetarist writings to identify the primary distinctions. In addition, we review recent findings concerning learnability-and therefore plausibility-of competing rational expectations equilibria. These indicate that when FTPL and monetarist equilibria differ, the latter are more plausible in the vast majority of cases. Under Ricardian assumptions, necessary for clear distinctions, theoretical analysis indicates that fiscal and monetary coordination is not necessary for macroeconomic stability.

Abstract:
The fiscal theory of the price level (FTPL) has attracted much attention but disagreement remains concerning its defining characteristics. Some writers have emphasized implications regarding interest-rate pegging and determinacy of RE solutions, whereas others have stressed its capacity to generate equilibria in which price level trajectories mimic those of bonds and differ drastically from those of money supplies. We argue that the FTPL attained prominence precisely because it appeared to provide a theory whose implications differ greatly from conventional monetary analysis; accordingly we review monetarist writings to identify the primary distinctions. In addition, we review recent findings concerning learnability - and therefore plausibility - of competing RE equilibria. These indicate that when FTPL and monetarist equilibria differ, the latter are more plausible in the vast majority of cases. Under Ricardian assumptions, necessary for clear distinctions, theoretical analysis indicates that fiscal and monetary coordination is not necessary for macroeconomic stability.

Abstract:
The fiscal theory of the price level (FTPL) has attracted much attention but disagreement remains concerning its defining characteristics. Some writers have emphasized implications regarding interest-rate pegging and determinacy of RE solutions, whereas others have stressed its capacity to generate equilibria in which price level trajectories mimic those of bonds and differ drastically from those of money supplies. We argue that the FTPL attained prominence precisely because it appeared to provide a theory whose implications differ greatly from conventional monetary analysis; accordingly we review monetarist writings to identify the primary distinctions. In addition, we review recent findings concerning learnability - and therefore plausibility - of competing RE equilibria. These indicate that when FTPL and monetarist equilibria differ, the latter are more plausible in the vast majority of cases. Under Ricardian assumptions, necessary for clear distinctions, theoretical analysis indicates that fiscal and monetary coordination is not necessary for macroeconomic stability.

Fiscal theory of the price level, quantity theory, monetarism, monetary-fiscal policy coordination

Abstract:
It has become increasingly evident that the Federal Reserve's official strategy of the past decade, involVing the adherence to target paths for monetary aggregates, is not currently being utilized to any significant extent. While some commentators welcome and others deplore this development, most would agree that a need exists for a more explicit and coherent strategy for the conduct of monetary policy. The present paper seeks to advance the strategic discussion in several ways. One involves a comparative consideration of targets for nominal GNP and the price level, with emphasis on specificational robustness and implications for output variability. A second pertains to various "indicator" variables recently suggested by Fed officials and others. In this regard, it is necessary to be clear and specific about the role of potential indicators. Consequently, a careful review of the relevant conceptual distinctions--concerning instruments, targets, indicators, etc.--is reqUired. Finally, the proposal that strategy should be conducted so as to place minimal reliance on quantity variables is given some attention, in the context of evidence concerning the merits of an interest rate instrument.

Abstract:
This paper seeks to advance the discussion of monetary policy strategies in several ways. One involves a comparison of targets for nominal GNP and the price level, with emphasis on specificational robustness and implications for output variability. A second pertains to various "indicator" variables recently suggested by Federal Reserve officials. In this regard, a careful review of the relevant conceptual distinctions--concerning instruments, targets, indicators, etc.--is required. Finally, the proposal that strategy should be conducted so as to place minimal reliance on quantity variables is given attention, in the context of evidence concerning the merits of an interest rate instrument.

Abstract:
This paper attempts to provide an evaluation of both strengths and weaknesses of the real business cycle (RBC) approach to the analysis of macroeconomic fluctuations. It begins with a description of the basic analytical structure typically employed, one in which individual households make consumption and labor supply decisions while producing output from capital and labor inputs, hired on competitive markets, according to a technology that is subject to stochastic shocks. It then explores conditions on parameter values that are needed for a model of this type to yield fluctuations that provide a good quantitative match to those observed in the postwar U.S. quarterly data. The plausibility of the hypothesis that (unobservable) aggregate technology shocks have the requisite variability is considered and problems with certain cross correlations are noted. Relevant evidence obtained by formal econometric methods is summarized and a few tentative conclusions regarding business cycle research are suggested.

Abstract:
The "new open-economy macroeconomics" seeks to provide an improved basis for monetary and exchange-rate policy through the construction of open-economy models that feature rational expectations, optimizing agents, and slowly adjusting prices of goods. This Paper promotes an alternative approach for constructing such models by treating imports not as finished consumer goods but rather as raw-material inputs to the home economy's productive process. This treatment leads to a clean and simple theoretical structure that has some empirical attractions as well. A particular small-economy model is calibrated and its properties exhibited, primarily by means of impulse response functions. The preferred variant is shown to feature a pattern of correlations between exchange-rate changes and inflation that is more realistic than provided by a more standard specification. Important recent events are interpreted in light of the alternative models.

Exchange rates and inflation, monetary policy rules, new open economy macroeconomics

Abstract:
The 'new open-economy macroeconomics' seeks to provide an improved basis for monetary and exchange-rate policy through the construction of open-economy models that feature rational expectations, optimizing agents, and slowly adjusting prices of goods. This paper promotes an alternative approach for constructing such models by treating imports not as finished consumer goods but rather as raw-material inputs to the home economy's productive process. This treatment leads to a clean and simple theoretical structure that has some empirical attractions as well. A particular small-economy model is calibrated and its properties exhibited, primarily by means of impulse response functions. The preferred variant is shown to feature a pattern of correlations between exchange-rate changes and inflation that is more realistic than provided by a more standard specification. Important recent events are interpreted in light of the alternative models.

Abstract:
Recently it has been argued that a monetary policy of nominal income targeting would result in dynamically unstable processes for output and inflation. That result holds in a theoretical model that includes backward-looking IS and Phillips curve relations, but these are rather special and theoretically unattractive. The present paper demonstrates that replacement of the special Phillips curve with one of several more plausible specifications overturns the instability result, whether or not the IS equation is replaced with a forward-looking version. Thus the instability result is quite fragile and therefore provides almost no basis for a negative judgment regarding nominal income targeting.

Abstract:
Recently it has been argued that a monetary policy of nominal income and targeting" would result in dynamically unstable processes for output and inflation. That results holds in a" theoretical model that includes backward-looking IS an Phillips curve relations rather special and theoretically unattractive. The present paper demonstrates that replacement of" the special Phillips curve with one of several more plausible specifications overturns the" instability result, whether or not the IS equation is replaced with a forward-looking version. " Thus the instability result is quire fragile and therefore provides almost no basis for a negative" judgment regarding nominal income targeting.

Abstract:
This paper argues that, in studying the monetary policy transmission process, more emphasis should be given to the systematic portion of policy behavior and correspondingly less to random shocks basically because shocks account for a very small fraction of policy-instrument variability. Analysis of the effects of the systematic part of policy requires structural modelling, rather than VAR procedures, because the latter do not give rise to behavioral relationships that can plausibly be regarded as policy-invariant. By use of an illustrative open- economy structural model based on optimizing analysis, and considering variants, the paper characterizes the effects of policy parameter settings by means of impulse response functions and root-mean-square statistics for target errors. Different models give different answers to questions about the effects of systematic policy, so procedures for scrutinizing model specification are essential. In this regard, it is argued that vector autocorrelation functions, augmented by variance statistics for each of a model's variables, seem more promising than impulse response functions because the latter require shock identification, which is inherently a difficult process.

Abstract:
An elementary exposition is presented of a convenient and practical solution procedure for a broad class of linear rational expectations models. The undetermined-coefficient approach utilized keeps the mathematics very simple and permits consideration of alternative solution criteria.

Abstract:
Topics covered in this survey paper include the following: distinguishing rules from discretion in practice; the feasibility of rule-like behavior by an independent central bank; optimal control vs. robustness as research strategies; choice among target variables; growth-rate vs. growing-level target paths; feasibility of interest rate and monetary base instruments; nominal indeterminacy as distinct from solution multiplicity; root-mean-square performance measures with interest rate and monetary base instruments; operationality of rule specifications; stochastic vs. counterfactual historical simulation procedures; interactions between monetary and fiscal policies; and the fiscal theory of the price level.

Abstract:
This paper conducts counterfactual historical analysis of several monetary policy rules by contrasting actual settings of instrument variables with values that would have been specified by the rules in response to prevailing conditions. Of particular interest is whether major policy mistakes, judged ex post, would have been prevented by candidate rules. The rules studied include those of Taylor and McCallum, previously considered by Alison Stuart, plus several additional combinations of instrument and target variables. The time spans examined are 1962-1998 for the U.S. and U.K., and 1972-1998 for Japan. In addition to various substantive findings, the paper develops several methodological arguments. A surprising result is that rules' messages are evidently more dependent upon the specification of their instrument than their target variable.

Abstract:
The paper first presents reasons for viewing the uncovered interest-parity (UIP) relationship as more important, in terms of economic analysis, than the unbiasedness of forward rates as predictors of future spot exchange rates. The two hypotheses are closely related, so that test rejections of the latter tend to cast doubt on the former, but are not identical - so unbiasedness rejections are not conclusive for UIP.

Next, some representative evidence is presented that pertains to alternative versions of the unbiasedness test. Although s(t) = a + Bf(t-1) + e(t) and s(t) - s(t-1) = a + B(f(t-1) - s(t-1) + e(t) are equivalent under the null hypothesis of B = 1.0, they represent different classes of alternative hypotheses. Empirically, they give rise to extremely different outcomes, estimates of B being very close to 1.0 in the former equation but in the vicinity of -3.0 in the latter. In a generalized specification that includes both as special cases, the results strongly favor the second specification - thereby rejecting unbiasedness.

Finally, three possible explanations for the B = -3 result are considered and related to the UIP condition. Of these three, the latter two - one involving systematically irrational expectations and the other an additional relationship reflecting monetary policy behavior - are consistent with UIP. The policy-response hypothesis, that monetary authorities manage interest-rate differentials so as to resist rapid changes in exchange rates and in these differentials, is attractive conceptually and is capable of explaining not only the B = -3 finding, but also several other notable features of the data.

Abstract:
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.

Abstract:
This paper asks whether relations of the IS-LM type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations. The main result is that only one change -- the addition of a term regarding expected future income -- is needed to make the IS function match a fully optimizing model, whereas no changes are needed for the LM function. This modification imparts a dynamic, forward-looking aspect to saving behavior and leads to a model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications. Theoretical applications concerning price level determinacy and inflation persistence are included.

Abstract:
This paper begins with a description of the inflation targeting arrangements currently in place in the four above-mentioned countries and their performance records through mid-1995 are reviewed. It is argued, however, that too little time has passed for conclusions to be drawn, so that tentative evaluations of inflation targeting need to be based on theoretical analysis and more generalized historical experiences. Accordingly, two alternative rationalizations are considered, one stemming from the literature on dynamic inconsistency and the other based on more pragmatic considerations. In addition, it is asked whether some other nominal magnitude might be preferable as a target variable and the issue of growth-rate versus growing-level target paths is addressed.

Abstract:
Many macroeconomic models involving rational expect at ions give rise to an infinity of solution paths, even when the models are linear in all variables. Some writers have suggested that this non-uniqueness constitutes a serious weakness for the rational expectations hypothesis. One purpose of the present paper is to argue that the non-uniqueness in question is not properly attributable to the rationality hypothesis but, instead, is a general feature of dynamic models involving expectations. It is also argued that there typically exists, in a very wide class of linear rational expectations models, a single solution that excludes "bubble" or "bootstrap" effects -- ones that occur only because they are arbitrarily expected to occur. A systematic procedure for obtaining solutions free from such effects is introduced and discussed. In addition, this procedure is used to interpret and reconsider several prominent examples with solution multiplicities, including ones developed by Fischer Black and John B. Taylor.

Abstract:
Much recent analysis of international monetary and fiscal policy issues, such as the choice of an exchange-rate regime or the design of a policy coordination scheme, has been conducted by stochastic simulations with multicountry econometric models. In these studies, it has become standard practice to consider alternative policy rules of a particular form that calls for departures of a policy instrument, from some "baseline" reference path, that are proportional to deviations of a specified target variable from its own baseline path. The present paper argues, however, that this standard rule form is seriously defective for evaluating such issues because the implied rules (1) often fail to be operational and (2) have associated performance measures that can be misleading in important cases. An example is presented that concerns the international "assignment problem" of optimally pairing instruments with policy objectives.

Abstract:
This paper considers whether 'liquidity trap' issues have important bearing on the desirability of inflation targeting as a strategy for monetary policy. From a theoretical perspective, it has been suggested that 'expectation trap' and 'indeterminacy' dangers are created by variants of inflation targeting, the latter when forecasts of future inflation enter the policy rule. This paper argues that these alleged dangers are probably not of practical importance. From an empirical perspective, a quantitative open-economy model is developed and the likelihood of encountering a liquidity trap is explored for several policy rules. Also, it is emphasized that, if the usual interest rate instrument is immobilized by a liquidity trap, there is still an exchange-rate channel by means of which monetary policy can exert stabilizing effects. The relevant target variable can still be the inflation rate.

Abstract:
This paper addresses a prominent empirical failure of the expectations theory of the term structure of interest rates under the assumption of rational expectations. This failure concerns the magnitude of slope coefficients in regressions of short rate (or long- rate) changes on long-short spreads. It is shown that the anomalous empirical findings can be rationalized with the expectations theory by recognition of an exogenous random (but possibly autoregressive) term premium plus the assumption that monetary policy involves smoothing of an interest rate instrument -- the short rate -- together with the responses to the prevailing level of the spread.

Abstract:
Dynamic optimizing models with an IS-LM-type structure and slow price adjustments have been used for much recent monetary policy analysis, but usually with capital and investment treated as exogenous a significant restriction. This paper demonstrates that investment decisions can be endogenized without undue complexity in such models and that these can be calibrated to provide reasonably realistic dynamic behavior. It is necessary, however, to include capital adjustment costs; models with no adjustment costs match cyclical data very poorly. Indeed, their match is considerably poorer than models with constant capital. The paper also finds that the preferred adjustment-cost specification is not close to quadratic.

Abstract:
(1) Medium-of-exchange money will not entirely disappear in the foreseeable future. (2) In economies with no currency but settlement balances at the central bank, policy can be conducted much as at present by activist adjustment of overnight interest rates. (3) In economies without any money there can be no monetary policy. Liabilities of some official entity might serve as the medium of account, but there could be rivals. (4) A broad commodity-bundle monetary standard could be viable, even with a redemption medium, and there is scope for quantitative analysis of such systems. (5) The number of distinct national currencies may decline sharply.

Abstract:
The paper's arguments include: (1) Medium-of-exchange money will not disappear in the foreseeable future, although the quantity of base money may continue to decline. (2) In economies with very little money (e.g., no currency but bank settlement balances at the central bank), monetary policy will be conducted much as at present by activist adjustment of overnight interest rates. Operating procedures will be different, however, with payment of interest on reserves likely to become the norm. (3) In economies without any money there can be no monetary policy. The relevant notion of a general price level concerns some index of prices in terms of a medium of account. The liabilities of some official entity might serve as the medium of account, but there could be viable rivals if policy is poor. (4) A broad commodity-bundle monetary standard could be viable, even with a redemption medium, and there is scope for quantitative analysis of the properties of such a system. (5) The number of distinct national currencies may decline sharply, with the emergence of a small number of currency areas and floating exchange rates across these areas.

Abstract:
Both academic thinking about monetary economics and the practice of monetary policy have changed dramatically since 1971-1973, when the rational expectations revolution was beginning and the Bretton Woods system was crumbling. The present paper considers whether the various changes that have taken place were influenced primarily by economic theory or by empirical evidence-or by a combination of the two. Monetary economics, like macroeconomics more generally, passed through the rational expectations period into one dominated by real business cycle (RBC) analysis, which denies monetary policy any significant role in the generation or the dampening of cyclical fluctuations in crucial real variables. Recently, however, the analysis of monetary policy by both academic and central bank economists has been increasingly conducted in small quantitative structural models that combine the optimizing aspect of RBC analysis with various assumptions implying real effects of monetary policy actions due to slow adjustment of nominal prices. These models therefore attempt to combine rather strict theoretical discipline with features that permit an enhanced degree of empirical veracity. It is apparent, accordingly, that both theoretical and empirical analysis have been essential in bringing about alterations in monetary policy analysis between 1971-1973 and 1998.

Abstract:
The paper presents a measure of monetary impulse that is intended to reflect the medium-term inflationary implications of a nation`s current monetary policy. The measure consists of the growth rate of the monetary base, adjusted for reserve requirement changes and augmented by an implicit forecast of future growth rates of base velocity. Time series plots of the impulse measure for the G-7 countries are presented, and are compared with plots of inflation and of two alternative monetary indicatorsthe yield curve slope and the growth rate of a broad monetary aggregate. The impulse measure serves well as a medium-term indicator of future inflation, and on balance matches or outperforms the alternative indicators.

Abstract:
No abstract is available for this paper.

Abstract:
This Paper reviews the distinction between the timeless perspective and discretionary modes of monetary policymaking, the former representing rule-based policy as recently formalized by Woodford (1999b). In models with forward-looking expectations there is typically a second inefficiency from discretionary policymaking, besides the inflationary bias. The Paper presents calculations of the quantitative magnitude of this second inefficiency, using calibrated models of two prominent types; it examines the distinction between instrument rules and targeting rules; and briefly investigates operationality issues involving the unobservability of current output and the possibility that an incorrect concept of the natural-rate level of output is used by the policymaker.

Discretion, expectations, policymaking, rules

Abstract:
Much recent monetary policy analysis has featured stochastic simulations with small structural macroeconomic models that include: a spending vs. saving ( IS') sector; a price-adjustment sector; and an interest rate policy rule. The first two are frequently specified so as to reflect optimizing behavior; policy may or may not be specified as optimizing depending on the study's objectives. Some leading issues concern modifications to simple quantitative optimizing models that are needed to generate realistic degrees of persistence in inflation and output-gap variables. A major policy issue is whether it is desirable for monetary policy to respond strongly to the output gap. The paper argues that the latter is unobservable and considers the implications of using a trend-type measure while the true concept is of a type more in keeping with basic theory. In such circumstances, highly undesirable consequences are likely to ensue if policy responds strongly to the measured gap.

Abstract:
This paper explores several issues concerning a possible zero lower bound (ZLB) including its theoretical rationale; the magnitude of effects of low sustained inflation on real interest rates; the validity of analyzing monetary policy in models with no monetary variables; and the dynamic stabilizing properties of Taylor rules in a ZLB context. The most important argument, however, is that if the short nominal rate is immobilized at zero, there nevertheless exists a route for monetary stabilization policy to be effective --- via the foreign exchange market. Its quantitative importance is examined in a calibrated, optimizing, open-economy model.

Abstract:
The following arguments are developed: (i) models without monetary aggregates do not imply that inflation is a non-monetary phenomenon and are not necessarily non-monetary models; (ii) theoretical considerations suggest that such models are misspecified, but the quantitative significance of this misspecification is very small; (iii) some prominent arguments based on 'indeterminacy' findings are of dubious merit: there are reasons for believing that findings of solution multiplicity are theoretical curiosities that have no real world significance; (iv) monetary policy rules that violate the Taylor principle, by contrast, possess another characteristic the absence of E-stability that suggests undesirable behavior in practice.

Abstract:
To consider the prospects, looking 20-30 years into the future, for monetary policymaking in accordance with policy rules, one must evaluate their present importance. That requires some definition of what constitutes rule-based monetary policy in practice, since no actual central bank will ever be literally bound by any simple formula (or any strict optimal control scheme). Consideration of the rules-versus-discretion literature, plus more recent analysis by Woodford (1999), indicates that rule-based policy is conducted to satisfy relationships specified from a timeless perspective.' Given this conception, it seems reasonably clear that today's prominent regimes (e.g., inflation targeting) do largely represent rule-based policymaking. Whether these will prevail into the future will depend in part on political trends, but their fundamental soundness gives room for hope. Regarding the effects of a gradually diminishing role of money, it would appear that the feasibility and attractiveness of rule-based policymaking will not be seriously impaired so long as a tangible medium of exchange has some importance, even if small. In the complete absence of monetary transactions, there would be no monetary policy of any type, rule-based or discretionary. But it seems highly unlikely that money will disappear in the foreseeable future.

Abstract:
This paper argues, first, that it is inappropriate to presume that central banks will, in the absence of any tangible precommitment technology, inevitably behave in a `discretionary' fashion that implies an inflationary bias. Furthermore, there is no necessary tradeoff between `flexibility and commitment.' Second, to the extent that the absence of any precommitment technology is nevertheless a problem, it will apply to a consolidated central bank-plus-government entity as well as to the central bank alone. Thus contracts between governments and central banks do not overcome the motivation for dynamic inconsistency, they merely relocate it. Several implications are discussed.

Abstract:
This paper reviews empirical findings, econometric issues,and theoretical results bearing upon the "monetary vs. fiscal policy" debate that began with the 1963 Friedrnan-Meiselman study.The main substantive conclusions are not very dramatic.The clearest is that an open-market increase in the money stock has a stimulative effect on aggregate demand, a conclusion that in turn implies that a money-financed increase in government expenditures (or reduction in taxes) is more stimulative than it would be if bond financed.This conclusion is based on empirical results obtained from St. Louis-type estimates and large scale economebic models and is supported by theoretical analysis involving both Ricardian and non-Ricardian assumptions. In the case of pure fiscal policy actions -- i.e.,bond-financed tax cutsor bond-financed expenditure increases --theory suggests that the latter should be at least as stimulative as the former and probably to a positive extent; evidence is mixed but not obviously inconsistent with this prediction.With respect to the textbook issue concerning the relative effects of pure monetary and fiscal actions, the evidence seems to support the notion that a sequence of $k open-market purchases, one each period, will be much more stimulative than a single but unreversed $k/period bond-financed increase in expenditures. The importance of this last issue is debatable.

Abstract:
This paper begins with an exposition of neoclassical growth theory, including several analytical results such as the distinction between golden-rule and optimal steady states. Next it emphasizes that the neoclassical approach fails to provide any explanation of steady-state growth in per capita values of output and consumption, and also cannot plausibly explain actual growth differences by reference to transitional episodes. Three types of endogenous growth models, which attempt to provide explanations of ongoing per-capita growth, are presented and discussed. The likelihood of strictly justifying steady-state growth with these models is very small, since it would require highly special parameter values, but the models' predictions may be reasonably accurate nevertheless.

Abstract:
This survey attempts to cover an extremely broad topic by organizing . around three sets of issues: ongoing (steady state) inflation; cyclical interaction of inflation with real variables; and positive analysis of monetary policy behavior. With regard to ongoing inflation, the paper demonstrates that the principal conclusions of theoretical analysis are not highly sensitive to details of model specification, provided that the latter posits rational agents free of money illusion. Whether one assumes finite-lived or infinite-lived agents, such models suggest that steady-state inflation rates will conform fairly closely to money stock growth rates, that superneutrality is not strictly implied but departures should be minor, and that socially optimal inflation rates correspond to the Chicago Rule. The first two of these conclusions are consistent with available evidence. With regard to the cyclical interaction of inflation with aggregate output and employment, there is much less professional agreement: four classes of aggregate-supply (or Phillips curve) theories -are currently in .use by researchers and at least two have been able thus far to withstand attempts at refutation. With regard to policy, a leading question is why the authorities have behaved, over the postwar era, in a manner that has resulted in a many-fold increase in the price level in most industrialized nations. A full answer will require a better theory of the political process than is now available, but an important insight regarding inflationary bias is suggested by models that focus on the effects of "discretionary" period-by-period decision making by a monetary authority that seeks to avoid unemployment as well as inflation.

Abstract:
In analyses of "liquidity trap" problems associated with the zero lower bound (ZLB) on nominal interest rates, it is important to emphasize the difference between policy rule changes, intended to help escape an existing ZLB situation, and maintained policy rules designed so as to avoid ZLB situations. Analysis assuming that rule changes would lead to a new RE equilibrium immediately seems implausible. Accordingly, the paper focuses on the design of a rule that should retain stabilization effectiveness even if the economy is temporarily shocked into a ZLB situation. The rule considered is one that uses as its instrument variable a weighted average of an interest rate and the rate of depreciation of the nominal exchange rate. With a small weight attached to the depreciation term, it will be nearly irrelevant in normal situations but call for strong adjustments when the ZLB condition prevails. Stabilizing properties of this "MC" rule are studied within a small open economy model developed by McCallum and Nelson. Results indicate that under ZLB conditions the MC rule will provide strong stabilizing policy actions yet, under conditions such that the ZLB constraint is not relevant, the MC rule need not hinder monetary policy.

Abstract:
The optimal currency area (OCA) concept is central to the economic analysis of monetary unions, as it clearly identifies the relevant optimizing tradeoff: extension of the area over which a single currency is used enhances allocative efficiency but reduces the possibility of tailoring monetary policy to the needs of different areas. Empirical work has verified the importance of various features of economies that make them strong or weak candidates for a common currency arrangement, but existing studies do not permit actual quantification of costs and benefits. Thus the OCA concept remains less than fully operational. A second relevant body of theory is that pertaining to currency crises. Formal models clarify various points concerning speculative attacks on fixed exchange rates, and show how abrupt reserve losses and depreciations can occur rationally at times when no major shocks are hitting the system. These models support the notion that a fixed (but adjustable) exchange- rate regime is not a viable option for most nations, given high mobility of financial capital. Also discussed is the recently- developed fiscal theory of price level determination, which if valid would have major implications for monetary-fiscal arrangements in currency unions. This theory does not contend that fiscal behavior drives an accommodative monetary authority, but rather that the price level roughly mimics the pattern of the government bond stock rather than base money when their paths differ drastically. An example is exposited in which there are two rational expectations solutions for an economy with a constant money supply: a traditional solution in which the price level is also constant and a fiscalist solution in which the price level and bond stock both explode as time passes. These solutions represent competing hypotheses about the behavior of actual economies; the paper suggests that the former is more likely to prevail in actuality.

Abstract:
For introductory presentation of issues involving simultaneous equation systems, a natural vehicle consists of supply and demand relationships for a single good. One would expect to find in econometrics textbooks a supply-demand example featuring actual data in which structural estimation methods yield more satisfactory results than does ordinary least squares. But a search of 26 existing textbooks finds no example with actual data in which all crucial parameter estimates are of the proper sign and are statistically significant. The present article accordingly develops a simple but satisfying example, for broiler chickens, based on U.S. annual data from 1960 to 1999.

Abstract:
This paper, prepared for the New Palgrave, attempts to summarize current mainstream views concerning the theory of money demand. A model is sketched in which a representative household is depicted as seeking to maximize utility over an infinite planting horizon, with each period`s consumption and leisure appearing as arguments of the utility function. The household chooses to hold non-interest-bearing money, even in the presence of assets with positive pecuniary yields, because it facilitates transactions and thereby reduces the amount of time and/or energy required in the process of "shopping`, i.e., acquiring goods to be consumed. Two distinct types of implied money-demand functions are derived: a "proper" demand function with arguments exogenous to the household and a portfolio balance relationship that is more similar in specification to the type of equation that normally appears in the money-demand literature. One section of the paper briefly reviews the historical evolution of ideas pertaining to money-demand theory, and suggests that major contributors have included Marshall, Hicks, and Sidrawki. A final section considers ongoing controversies concerning the role of uncertainty, the use of overlapping-generation and cash-in-advance approaches, and the interpretation of empirical results apparently suggestive of extremely slow portfolio adjustments.

Abstract:
This paper investigates empirically the possibility that a central bank could adhere to a macro-oriented monetary policy rule while also providing lender-of-last-resort services to the financial system. The method considered involves smoothing week-to-week movements of an interest rate instrument so as to achieve quarterly- average intermediate targets for the monetary base, with these specified so as to keep aggregate nominal spending growing steadily at a noninflationary rate. Simulations utilizing weekly U.S. data are conducted with a system consisting of a policy rule for the federal funds rate--one designed to hit monetary base targets obtained from a quarterly macroeconomic rule--and an empirically-based model of the response of base growth to funds rate movements. Results for the periods 1974-1979 (Sept.) and 1988-1991 suggest that such a procedure could succeed in reconciling macroeconomic goals with the provision of lender-of-last-resort services.

Abstract:
The recently-developed fiscal theory of price level determination contends that there is an important class of policy rules in which there exists a unique rational expectations solution that shows the price level to be dependent upon fiscal policy and independent of monetary variables. The present paper argues, however, that there is an alternative solution to these models that has entirely traditional (or monetarist') properties. This latter solution is perhaps the more plausible since it is the solution that is typically regarded as the bubble-free fundamentals' solution. The argument involves a respecification of feasible instrument variables.

Abstract:
The paper reconsiders the role of money and banking in monetary policy analysis by including a banking sector and money in an optimizing model otherwise of a standard type. The model is implemented quantitatively, with a calibration based on U.S. data. It is reasonably successful in providing an endogenous explanation for substantial steady-state differentials between the interbank policy rate and (i) the collateralized loan rate, (ii) the uncollateralized loan rate, (iii) the T-bill rate, (iv) the net marginal product of capital, and (v) a pure intertemporal rate. We find a differential of over 3% pa between (iii) and (iv), thereby contributing to resolution of the equity premium puzzle. Dynamic impulse response functions imply pro-or-counter-cyclical movements in an external finance premium that can be of quantitative significance. In addition, they suggest that a central bank that fails to recognize the distinction between interbank and other short rates could miss its appropriate settings by as much as 4% pa. Also, shocks to banking productivity or collateral effectiveness call for large responses in the policy rate.

Abstract:
This paper takes issue with two basic conclusions prevalent in the literature on central bank behavior. First, the paper argues that it is inappropriate to presume that central banks will, in the absence of any precommitment technology, necessarily behave in a 'discretionary' fashion that implies an inflationary bias. Since there is no functional connection between average rates of money creation (or inflation) and policy responsiveness to cyclical disturbances, it is entirely feasible for the bias to be avoided. In other words, there is no necessary tradeoff between 'flexibility and commitment.' Second, to the extent that the absence of any absolute precommitment technology is nevertheless a problem, it will apply to a consolidated central bank plus government entity as well as to the central bank alone. Thus contracts between governments and central banks do not overcome the motivation for dynamic inconsistency, they merely relocate it.

Abstract:
No abstract is available for this paper.

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No abstract is available for this paper.

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No abstract is available for this paper.

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No abstract is available for this paper.

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No abstract is available for this paper.

Abstract:
This paper reviews the distinction between the timeless perspective and discretionary modes of monetary policymaking, the former representing rule-based policy as recently formalized by Woodford (1999b). In models with forward-looking expectations, this distinction is greater than in the models that have been typical in the rules-vs.-discretion literature; typically there is a second inefficiency from discretionary policymaking, distinct from the familiar inflationary bias. The paper presents calculations of the quantitative magnitude of this second inefficiency, using calibrated models of two types prominent in the current literature. In addition, it examines the distinction between instrument rules and targeting rules; the results indicate that targeting-rule outcomes can be very closely approximated by instrument rules. Also included is a brief investigation of operationality issues, involving the unobservability of current output and the possibility that an incorrect concept of the natural-rate level of output, essential in measuring the output gap, is used by the policymaker. In all of the cases examined, the unconditional average performance of timeless perspective policymaking is at least as good as that provided by optimal discretionary behavior.

Abstract:
This paper suggests that the relevant question concerning "unit roots" in the U.S. real GNP time series pertains to the relative importance of difference-stationary and trend-stationary components. Various analytical approaches indicate than an accurate answer is not obtainable with existing data. The paper next considers whether trending series should be differences prior to use in regression analysis and suggests it may not matter greatly if autocorrelated residuals are avoided. Finally, the paper argues that the absence of cointegration among variables does not imply the absence of any practically useful long-run relationship.

Abstract:
In a recent paper, Canzoneri, Henderson, and Rogoff have shown that it is possible for the monetary authority to peg the nominal interest rate without creating price level indeterminacy in a simplified version of the 1975 Sargent-Wallace model. The present paper begins by reviewing that result, which involves a limiting case of a money supply rule that depicts the authority as responding to current values of the interest rate. Then it shows that there exists an alternative rule that will peg the nominal rate without creating indeterminacy, but that this rule induces a different pattern of price level fluctuations. Next the paper considers whether indeterminacy will prevail if the authority tries to effect a peg in a third way: by simply standing ready to buy and sell securities at the desired rate. Finally, the implication of the foregoing results are drawn for arguments concerning the real bills doctrine and some critical comments are directed at the recent attempted rehabilitation of that doctrine by Sargent and Wallace.

Abstract:
Cochrane (2007) has strongly questioned the basic economic logic of current mainstream monetary policy analysis, arguing that the standard notion - that determinacy of a rational expectations (RE) equilibrium suffices to imply that stable inflation behavior will be generated - is incorrect. This is because New Keynesian (NK) models are typically consistent with the existence of RE paths with explosive inflation rates (in addition to one or more stable paths) that normally do not imply explosions in real variables relevant for transversality conditions. Consequently, the usual logic does not imply the absence of explosive inflation. That result does not, however, justify negative conclusions about NK analysis. For there is a different criterion that is logically satisfactory for the purpose at hand. This is the requirement that, to be plausible, a RE solution must satisfy the property of least-squares learnability. Adoption of this criterion, which should be attractive to analysts concerned with actual monetary policy, serves to justify in principle the bulk of current mainstream analysis.

Abstract:
A number of recent studies have attempted to test propositions concerning "long runt" economic relationships by means of frequency-domain time series techniques that concentrate attention on low frequency co-movements of variables.The present paper emphasizes that many of these propositions involve expectational relationships that are not inherently related to specific frequencies or periodicities. Thus the association of low-frequency time series test statistics with long-run economic propositions is not generally warranted. That such an association can be misleading is demonstrated by analysis of examples taken from notable papers by Geweke, Lucas, and Summers.

Abstract:
The purpose of this paper is to review and evaluate the most important existing criticisms of policy strategies that feature adherence to money stock targets. Four main categories of criticism (and counterargumerits) are analyzed. The first of these involves the claim that accurate money stock control is infeasible while the second contends that such control can only be obtained along with extreme volatility of interest rates. The third emphasizes difficulties resulting from technical change and deregulation, and the fourth concerns strategic issues of rules vs. discretion, activist vs. non-activist policy, and the logical function of intermediate targets.

Abstract:
This paper reviews a specific group of recent publications by Black, Fama, Hall, and Greenfield and Yeager that (i) encourage the relaxation of government controls on the banking industry, (ii) emphasize the possibility of an economy in which most transactions are carried out through an accounting system rather than any tangible medium of exchange, and (iii)suggest that improved monetary performance could be induced by separating the unit of account from the medium of exchange.The main substantive conclusions are as follows. First, a system with an unregulated banking sector and a government-issued currency would be viable and might reduce inefficiencies resulting from reserve requirements, a point that has been recognized by neoclassical monetary economists.The second main class of systems discussed in the reviewed papers -- one with a composite-commodity medium of account and no convertibility provision -- is quite different. If there were literally no medium of exchange, the non-coercive government designation of the unit of account would encounter no inconsistency but would be extremely fragile. More realistically, with some circulating private currency the latter would tend to become the medium of account as well as the medium of exchange and would tend to be issued in excess, thereby separating the unit of account from the officially-designated bundle of commodities. Several conclusions regarding analytical approach are also developed.

Abstract:
The model developed in Robert Lucas`s influential "Expectations and the Neutrality of Money" has not been widely used for extensions or modifications of the original analysis, in part because of its difficulty of manipulation.The present paper describes a linearized version that--unlike other models prominent in the rational expectations literature--retains the original`s mainfeatures yet is comparatively easy to manipulate.Two examples of modifications facilitated by this linearization are included. These involve an autoregressive money growth specification and the assumption of lump-sum (rather than proportional)monetary transfers.

Abstract:
This paper concerns the minimal-state-variable (MSV) criterion for selection among solutions in rational expectations (RE) models that feature a multiplicity of paths that satisfy all of the model's conditions. It compares the MSV criterion with others that have been proposed, including the widely used saddle-path (or dynamic stability) criterion. It is emphasized that the MSV criterion can be viewed as a classification scheme that delineates the unique solution that is free of bubble or sunspot components. This scheme is of scientific value as it (a) yields a single solution upon which a researcher can focus attention if desired and (b) provides the basis for a substantive hypothesis that actual market outcomes are generally of a bubble-free nature. In the process of demonstrating uniqueness of the MSV solution for a broad class of linear models, the paper exposits a convenient and practical computational procedure. Also, several applications to current issues regarding monetary policy are outlined.

Abstract:
This paper presents stochastic simulation results pertaining to the performance of nominal income targeting, here represented as a monetary policy rule that sets quarterly values of an interest rate instrument in response to deviations on existing studies of nominal income growth from a specified target rate. It attempts to improve on existing studies by conducting analysis in a macroeconomic model that is designed to respect both neoclassical theory and empirical regularities. Accordingly, the basic theoretical framework is one in which individual economic agents are depicted as solving dynamic optimization problems with rational expectations, but in an environment such that prices respond only gradually to changes in conditions. The adjustment specification used is the P-bar model, which satisfies the strict natural rate hypothesis. Two improvements over previous work by the authors are that consumption choices reflect habit formation, which lends some inertia to the system, while the modeled economy is open to international flows of goods and securities. Both of these features have major effects on the system's properties. Quantitatively, the model is calibrated to post-Bretton Woods U.S. quarterly data. The results suggest that nominal income targeting deserves serious consideration as a monetary policy strategy.

Abstract:
This paper considers the possibility that, in linear rational expectations (RE) models, all determinate (uniquely non-explosive) solutions coincide with the minimum state variable (MSV) solution, which is unique by construction. In univariate specifications of the form y(t) = AE(t)y(t+1) + Cy(t-1) + u(t) that result holds: if a RE solution is unique and non-explosive, then it is the same as the MSV solution. Also, this result holds for multivariate versions if the A and C matrices commute and a certain regularity condition holds. More generally, however, there are models of this form that possess unique non-explosive solutions that differ from their MSV solutions. Examples are provided and a strategy for easily constructing others is outlined.

Abstract:
This paper begirE by identifying the distinguishing characteristic of the "real business cycle" (RBC) class of macroeconomic models. It then scruitinizes existing evidence, presented in support of the RBC approach, of three types: calibrated general equilibrium models with no monetary sector, vector-autoregression variance decomposition results, and univariate measurements of trend and cyclical components. It is argued that, in fact, these types of evidence have so far provided little support for the RBC hypothesis. Finally, with regard to an important alternative hypothesis concerning macroeconomic fluctuations, the paper proposes a partial rationalization for the stickiness of nominal product prices.

Abstract:
This paper provides an outline of the historical development of Keynesian macroeconomics. It first argues that the business-cycle model of J.M. Keynes`s General Theory featured analytical ingredients that were present in earlier writings and attained its theoretical precision only in contributions made later. Remaining sections of the paper focus on the key characteristic of Keynesian theory, namely, a postulated stickiness of nominal prices that enables aggregate demand to play a greater role in output determination than it does in flexible-price classical analysis. Three approaches that have been historically important are ones relying upon (i) equilibria conditional on given prices, (i ) algebraic Phillips-type price adjustment relations, and (iii) equilibrium analysis `with incomplete information. The paper reviews difficulties with each of these and concludes with a discussion of relevant issues of today.

Abstract:
It is argued that learnability/E-stability is a necessary condition for a RE solution to be plausible. A class of linear models considered by Evans and Honkapohja (2001) is shown to include all models of the form used by King and Watson (1998) and Klein (2000), which permits any number of lags, leads, and lags of leads. For this broad class it is shown that, if current-period information is available in the learning process, determinacy is a sufficient condition for E-stability. It is not a necessary condition, however; there exist cases with more than one stable solution in which the solution based on the decreasing-modulus ordering of the system's eigenvalues is E-stable. If in such a case the other stable solution(s) are not E-stable, then the condition of indeterminacy may not be important for practical issues.

Abstract:
The main section of this paper discusses competing theories of aggregate supply that are currently being utilized in macroeconomic models with rational expectations. The distinction between flexible-price equilibrium models and models with nominal contracts is emphasized and three models of the latter type are described and contrasted, it is argued that rejection of flexible-price equilibrium theories, as the evidence seems to warrant,does not require abandonment of the equilibrium approach. Also included are remarks on the present status of the rational expectations version of the natural-rate hypothesis. The second section of the paper briefly discusses a few issues concerning the equilibrium approach and aggregate demand, with attention devoted to the overlapping-generations framework. The third section considers a recent attempt, involving the use of "vector autoregression"models, to denigrate the importance of the Lucas critique of traditional policy-evaluation procedures.

Abstract:
No abstract is available for this paper.

Abstract:
Recent experience does not include a "monetarist experiment," as some have argued, but may slightly reinforce preexisting reasons for doubting that the best way of formulating monetarist policy prescriptions is in the form of a constant growth rule for the money stock.A more desirable rule would pertain to the monetary base, which is much more directly under Fed control. While a constant base growth rule might provide good macroeconomic performance, better results should be obtainable from a rule that at regular intervals adjusts the base growth rate upward or downward depending on whether nominal GNP is below or above a target path that specifies constant, non-inflationary growth for that variable. This type of rule is activist, to an extent, but is non-discretionary.The implied absence of policy-making flexibility is desirable for reasons explained in the literature on dynamic inconsistency.

Abstract:
No abstract is available for this paper.

Abstract:
This paper begins by identifying nominal price stickiness as the logical basis for the Keynesian or activist point of view concerning demand management policy. It then characterizes two alternative approaches to policy analysis that have been adopted by adherents of the Keynesian position, the "disequilibrium" and "Phillips curve" approaches, The former is inherently defective, it is argued, while the latter has yet to be satisfactorily implemented. Indeed, implementation that is not open to Lucas-critique weaknesses is not in sight. In response to the implied dilemma for policy makers, the paper describes a rule for the conduct of monetary policy that relies upon minimal understanding of price-adjustment dynamics and which should be robust to regulatory and technological change In the economy`s financial and payments institutions. A bit of evidence is presented to suggest that the rule would, if adopted, lead to approximately zero inflation (on average) and to output/employment fluctuations that are small by historical standards.. Possible criticisms relating to recent European experience and to recent theoretical developments are considered.

Abstract:
This paper discusses four current topics in monetary policy analysis, each of which hinges on the possibility of multiple solutions in rational expectations (RE) models. In three of these cases - involving inflation forecast targeting, the zero-lower bound deflation trap, and the fiscal theory of the price level - analysis based on E-stability and adaptive learnability of the solutions suggests that only one of them is a viable equilibrium candidate. Thus the dangers alleged to prevail, in these cases, are not ones with which actual policymakers need to be concerned. In the case of the Taylor principle, by contrast, policy behavior that violates the principle is genuinely undesirable, since all of the RE equilibria fail to be learnable.

Abstract:
After some historical discussion of the rational expectations (RE) solution procedures of John Muth, Alan Walters, and Robert Lucas, this paper considers the relevance for actual economies of issues stemming from the existence of multiple RE equilibria. In all linear models, the minimum state variable (MSV) solution - as defined by the author (JME, 1983) - is unique by construction. While it might be argued that the MSV solution warrants special status as the bubble-free solution, the focus in this paper is on its adaptive, least-squares learnability by individual agents, as discussed extensively in important recent publications by George Evans and Seppo Honkapohja.

Although the MSV solution is learnable and the main alternatives are not, in most standard models, Evans and Honkapohja have stressed an example in which the opposite is true. The present paper shows, however, that parameter values yielding that result are such that the model is not well formulated, in a specified sense (one that avoids implausible discontinuities). More generally, analysis of a pair of prominent univariate specifications, featured by Evans and Honkapohja, shows that the MSV solution is invariably learnable in these structures, if they are well formulated.

Abstract:
Several recent papers have usefully emphasized the inefficiency that arises from discretionary monetary policymaking, relative to optimal policy from a 'timeless perspective,' in macroeconomic models with forward-looking private behavior. The inefficiency in question is in terms of average outcomes of the conditional expectation of a policy objective that reflects the discounted present value of current and future period losses (which involve squared deviations of inflation and output from specified target levels). In the literature, most of the analysis has been conducted in an optimizing model that features a Calvo-Rotemberg price adjustment equation that includes a 'cost-push' shock term. This literature suggests that policy, which keeps inflation equal to a negative multiple of the change in the output gap, is optimal with respect to the criterion mentioned above - the unconditional expectation of the policymaker's objective function. Results reported here show, however, that this is not the case - that an alternative policy rule, suggested by the approach of 'policy design' rather than by 'optimal control,' delivers superior results.

Abstract:
This paper reports results of simulation exercises that explore several questions relating to the design of rules for monetary policy. Emphasis is given to issues raised by the concept of rule operationality, i.e., reliance on feasible instrument variables and information sets. Many of the results pertain to rules of the Taylor type -- i.e., with an interest rate instrument set in response to inflation and output-gap measures -- but some are reported for rules using a nominal income target and/or a monetary base instrument. The macroeconomic model utilized is small in scale but features a specification designed to represent rational dynamic optimizing choices by the economy's private agents. Saving and portfolio-balance behavior are expressed by optimizing versions of exceptional IS and LM functions, with gradual price adjustments specified differently in two variants of the model. One variant uses the well-known Calvo-Rotemberg price adjustment relation, whereas the second employs a newly-rationalized version of the Mussa-McCallum-Barro-Grossman P-bar model. Parameter values are estimated by instrumental variables on U.S. quarterly data for 1995-1996.

Abstract:
This expository paper describes major developments during the second decade of rational-expectations macroeconomics, roughly 1982-1991. Topics attracting the most attention from researchers differed from those of 1972-1981, with considerable emphasis being devoted to technical matters. Here the discussion focuses on four prominent areas: real business cycle analysis, growth theory and its empirical application, issues involving unit roots in macroeconomic time series, and sticky-price models of aggregate supply. The paper concludes by arguing that the current state of knowledge in macroeconomics is not as bad as is often suggested.

Abstract:
No abstract is available for this paper.

Abstract:
In a very broad class of dynamic linear models, if agents possess knowledge of current endogenous variables in a least-squares learning process, determinacy of a rational expectations (RE) equilibrium is sufficient but not necessary for learnability of that equilibrium. Thus, since learnability is an attractive necessary condition for plausibility of any equilibrium, there may exist a single plausible RE solution even in cases of indeterminacy. This paper proposes and outlines a distinct criterion that plausible models should possess, termed well formulated (WF), which rules out infinite discontinuities in the implied impulse response functions. The paper explores the relationship between this WF property and learnability, under the information assumption mentioned above, and finds that they often agree but neither strictly implies the other. Extending the P-matrix requirement, implied for specified matrices by the WF property, to one that demands positive dominant-diagonal matrices would guarantee both WF and learnability, but a suitable rationale has not been found. Finally, under a second information assumption, which gives the agents only lagged information on endogenous variables during the learning process, the situation is less favorable in the sense that learnability can be guaranteed only under special assumptions.

Abstract:
Consider a rational expectations (RE) model that includes a relationship between variables x_t and z_t+1. To be considered structural and potentially useful as a guide to actual behavior, this model must specify whether x_t is influenced by the expectation at t of z_t+1 or, alternatively, that z_t+1 is directly influenced (via some inertial mechanism) by x_t (i.e., that z_t is influenced by x_t-1). These are quite different phenomena. Here it is shown that, for a very broad class of multivariate linear RE models, distinct causal specifications involving both expectational and inertial influences will be uniquely associated with distinct solutions - which will result operationally from different specifications concerning which of the model's variables are predetermined. It follows that for a given structure, and with a natural continuity assumption, there is only one RE solution that is fully consistent with the model's specification. Furthermore, this solution does not involve "sunspot" phenomena.

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Abstract:
This paper compares the P-bar model of price adjustment with the currently dominant Calvo specification. Theoretically, the P-bar model is more attractive as it depends upon adjustment costs for physical quantities rather than nominal prices, while incorporating a one-period information lag. Furthermore, the resulting adjustment relation is more completely free of money illusion, in terms of dynamic relationships, and therefore satisfies the natural rate hypothesis of Lucas (1972), which is not satisfied by the Calvo model in any of its variants. Along the way, it shows that both the P-bar and Calvo models can be formulated in distinct versions in which current real wages are, or are not, allocative. Quantitatively, for a given calibration of the demand parameters, the implied time series properties of the inflation rate, output gap, and nominal interest rate are determined for various policy parameters, and are compared with quarterly data for the U.S. economy. Neither model dominates but, overall, the comparison seems somewhat more favorable to the P-bar model and certainly does not provide support for the dominant position held by the Calvo model in current monetary policy analysis.

Abstract:
This paper assesses the performance of a simple monetary policy rule - McCallum's rule. This rule targets nominal income using the monetary base as its instrument whilst making an allowance for any on-going changes in money velocity. The paper conducts a range of historical counterfactual simulation exercises to establish the likely impact on the UK economy of using such a rule over the period 1960 to 1994. The paper finds that had the rule been followed over that period a far superior inflationary performance would have resulted. Moreover, this improved performance would not have come about at the expense of heightened output or base money variability. The paper suggests that, while such a rule could never substitute for a more eclectic approach which uses a wider range of indicators, it could serve as a useful benchmark when assessing whether monetary policy is broadly "on track"; it is a effectively a dynamic M0 monitoring range. As such, the implied profiles from such a simple rule may help provide insurance against the type of "big" policy mistakes which the UK economy has been subject to over the last 25 years.