Working Paper No. 45
By Andrew G Haldane, Bennett T McCallum and Chris Salmon
We conduct counterfactual stochastic simulation of McCallum's monetary policy rule for the United Kingdom. This rule targets nominal GDP using the monetary base as its instrument. It is able to secure a dramatic improvement in inflation performance compared with historical outturns, at the same time imposing few countervailing costs, measured in terms of output or instrument instability. An example is given of how the rule might be used at an operational level in the setting of United Kingdom monetary policy.