Comments on "Specification and Analysis of a Monetary Policy Rule for Japan": A Central Banker's View

Professor McCallum has written a series of influential papers in which he chooses nominal GNP as the target and monetary base as the policy instrument. Since I believe that it is practically very difficult for a central bank to employ monetary base as the instrument, I was thus very pleased to find that in a new paper he seriously considered the possibility of using the short-term interest rate as the instrument variable. Unfortunately, the paper concluded that monetary base was preferable. The purpose of this comment is to show why it is difficult to use monetary base as the instrument variable directly controlled by the central bank, and why further research on the subject using the short-term interest rate as the policy instrument is needed.