Evaluating McCallum's rule when monetary policy matters

This paper provides new evidence on the usefulness of McCallum's proposed rule for monetary policy. The rule targets nominal GDP using the monetary base as the instrument. We analyze the rule using three very different economic models to see if the rule works well in different environments. Our results suggest that while the rule leads to lower inflation than there has been over the last 30 years, instability problems suggest that the rule should be modified to feed back on the growth rate of nominal GDP rather than the level.