Nomimal income targeting: An investigation of McCallum's rule in small-scale macroeconomic models

The goal of this dissertation is to evaluate a recent proposal for conducting monetary policy suggested by Bennett T. McCallum. McCallum's proposal consists of a monetary policy rule that targets nominal GDP and that allows the central bank to respond to deviations of nominal GDP from the target.;The empirical evaluation begins by estimating four small-scale macroeconomic models. Each model is then simulated dynamically and stochastically, over the period 1963 to 1993, both with and without McCallum's rule. The simulations without McCallum's rule use a constant money-growth monetary policy rule, of the type suggested by Milton Friedman, and function as a baseline for evaluating the properties of McCallum's rule.;The simulation results suggest that McCallum's rule may induce large and unstable fluctuations in key macroeconomic variables. However, when the simulations are stable, the rule out-performs a constant money-growth rule. I find that a simple modification to McCallum's original rule reduces the instability problem.