Can a forecast-based monetary policy be more successful than a rule?

Article Abstract:

It is important to select an appropriate monetary aggregate and duration of moving average time when building a rule for understanding money supply growth. A study using nominal gross national product (GNP) growth simulations on the lines of work carried out by McCallum, suggests that economic stability will be achieved most effectively when the monetary base rule uses the velocity growth rate from the previous three months. For rules relating to the M1 and M2 measurements of money, major improvements can be achieved in economic stability with minor improvements in forecasting velocity. In terms of monetary base rules, there is no such clear cut relationship between economic stability and the accuracy of forecasts.

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Comparing interest-rate spreads and money growth as predictors of output growth: Granger causality in the sense Granger intended

Article Abstract:

Output can be most accurately predicted on an in-sample basis through measuring the difference between the rate for six-month commercial paper and three-month treasury bills, through a calculation using regressions on the lines of Granger. Commercial paper is less accurate at predicting growth in future output using out-of-sample performance, and is only valid for the 1970s. However, the growth of the M2 measure of money performs better in forecasting future growth in output, performing better than the M1 measure of money, and the difference between the rate for federal funds and for treasury bonds.

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The predictive failure of the Baba, Hendry and Starr model of M1

Article Abstract:

The predictive failure of the M1 money aggregate model proposed by Baba et al was examined in terms of economic and statistical dynamics. The theoretical and empirical contribution of the interest rate spread between the long and short end of the term structure, the learning-adjusted interest rates on M1 and non-M1 M2 assets and the volatility of long-term interest rates was also analyzed. Evidence shows that the model fails over longer sample periods and that its specification underestimated the interest rate elasticity of money demand due to the learning-adjusted mechanism.

Economics, Research and Development in the Social Sciences and Humanities, Econometrics & Model Building, Models, Econometrics, Interest rates, Macroeconomics, Money demand, Business models, Elasticity (Economics)

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