Is the Taylor Rule Really Different from the McCallum Rule?

Abstract

When base velocity is a stable function of the Federal funds rate (FFR), the money base±nominal GDP targeting rule (McCallum rule) can be reparameterized and presented in terms of FFR as the policy instrument. Comparison of this McCallum modified policy rule with the popular Taylor rule suggests that these two rules and the FFR are actually closely related. Model-based evaluations of the two rules' stabilization properties indicate that the modified McCallum rule is similar to the Taylor rule. The key to this result is the degree of interest rate smoothing applied to the policy rules. (JEL E3, E52, E58)

Historical Monetary Policy Analysis and the Taylor Rule

“…12 McCallum (2000) and Razzak (2002) also investigated the relation between money-growth and interestrate-based policy rules. A grandparent of such comparisons is the classic study by Poole (1970), which was written while he was at the Federal Reserve.…”

Are Unconventional Monetary Policy and Large Scale Fiscal Policy Effective?: The Case of Japan

“…This article has been cited often. Razzak (2003) employed McCallum's rule for some countries. Judd and Motley (1993) presented a feedback rule in which central banks change the interest rate in response to divergence between actual and targeted nominal GDP growth rate.…”

A Preliminary Evaluation of Monetary Policy Rules for Russia

“…Given this unstable nature of the economic environment in Russia, the task of estimating a monetary policy rule is complicated and no single policy 6 The policy relevance of such concerns with real appreciation are somewhat doubtful, as is unclear if the real exchange rate of the Russian rouble is above its long run equilibrium value, or merely recovering from an undershooting (see IMF, 2003 Originally, both rules were designed to be used in the evaluation of the monetary policy in large industrial countries, and many observers expressed concerns regarding the effectiveness of this basic policy rules in evaluating the conduct of monetary policy in emerging economies. This concern raises the question as to what kind of modifications are needed to fit better the realities of emerging economies, with underdeveloped financial markets, dependence on 7 Razzak (2001) shows that the McCallum and Taylor rules are, as one should expect, cointegrated. 8 Perhaps the most traditional of those quasi "monetary targeters" was the German central bank, the Deutsche Bundesbank (more precisely, the Bundesbank announced M3 as an intermediate target -"Zwischenziel", it did not use it as an instrument or operational target).…”