Base Money Rules in the UK

Bank of England Working Paper No. 45

Posted: 14 Apr 1998

See all articles by Andrew Haldane

Andrew Haldane

Bank of England

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business; National Bureau of Economic Research (NBER)

Chris Salmon

Bank of England

Date Written: March 1996

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.

JEL Classification: E51, E52

Suggested Citation

Haldane, Andrew and McCallum, Bennett T. and Salmon, Chris, Base Money Rules in the UK (March 1996). Bank of England Working Paper No. 45, Available at SSRN: https://ssrn.com/abstract=74923

Andrew Haldane (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Bennett T. McCallum

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
412-268-2347 (Phone)
412-268-7357 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Chris Salmon

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

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