Specification of Policy Rules and Performance Measures in Multicountry Simulation Studies

June 1, 1992

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Format: Chicago

Bennett T. McCallum Specification of Policy Rules and Performance Measures in Multicountry Simulation Studies, (USA: International Monetary Fund, 1992) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Exchange rate arrangements, Fiscal policy, Foreign exchange, Real exchange rates

Keywords: Baseline value, Policy authorities, Policy authority, Policy rule, Price level variable, Real exchange rates, Target variable, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1992/041
Stock No:

WPIEA0411992
ISBN:

9781451846010
ISSN:

1018-5941

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