Targeting versus Instrument Rules for Monetary Policy: What is Wrong with McCallum and Nelson?

In their struggle against targeting rules, however, McCallum and Nelson seem to face an uphill battle. There is now a rapidly growing literature by many authors that successfully applies targeting rules to monetary policy analysis. This literature includes recent contributions by Benigno and Benigno (2003), Benigno and Woodford (2004a,b), Cecchetti (1998, 2000), Cecchetti and Kim (2004), Evans and Honkapohja (2004), Giannoni and Woodford (2003a,b and 2004), Kuttner (2004), Mishkin (2002), Onatski and Williams (2004), Preston (2004), Walsh (2003 and 2004a,b), Woodford (2004), and others. In the first drafts of Woodford’s (2003) book, there were no targeting rules; in the final, published version, targeting rules are prominent. In 1998, at a distinguished National Bureau of Economic Research (NBER)