The Svensson Versus Mccallum and Nelson Controversy Revisited in The Bmw Framework

Wurzburg Economic Paper No. 67

25 Pages Posted: 29 Mar 2006

See all articles by Peter Bofinger

Peter Bofinger

University of Würzburg - Institute of Economics and Social Sciences

Eric Mayer

University of Würzburg - Institute of Economics and Social Sciences

Date Written: February 1, 2006

Abstract

This note shows that the Svensson versus McCallum and Nelson controversy battled in the Federal Reserve Bank of St. Loius Review (September/ October 2005) can be mapped into a static version of a New Keynesian macro model that consists of an IS-equation, a Phillips curve and an inflation targeting central bank (e.g., Bofinger, Mayer, Wollmershäuser, (2006);Walsh (2002)). As a contribution to literature we supplement the controversy by a forceful graphical analysis. The general debate centers on the question by which notion monetary policy should be implemented. The two sides have fundamentally opposite views on this issue. Svensson argues for targeting rules as a notion of optimal monetary policy, whereas McCallum and Nelson promote simple instrument rules. In this note we systematically analyze these two categories of monetary policy rules. In particular we show that the rule discussed by McCallum and Nelson (2005) imposes different degrees of variability on the economy compared to a targeting rule when monetary policy falls prey to measurement error. To our opinion the hybrid Taylor rule developed by McCallum and Nelson contradicts the original idea of simple rules as a heuristic for monetary policy making and should be rebutted for practical reasons.

Keywords: inflation targeting, taylor rules, central bank strategis

JEL Classification: E52, E58, E30

Suggested Citation

Bofinger, Peter and Mayer, Eric, The Svensson Versus Mccallum and Nelson Controversy Revisited in The Bmw Framework (February 1, 2006). Wurzburg Economic Paper No. 67, Available at SSRN: https://ssrn.com/abstract=892744 or http://dx.doi.org/10.2139/ssrn.892744

Peter Bofinger (Contact Author)

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany
+49 931 312 944/5 (Phone)
+49 931 312 775 (Fax)

Eric Mayer

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
70
Abstract Views
950
rank
436,579
PlumX Metrics