Comments by Viv Hall Comments on: “Monetary rules when economic behaviour changes”

I enjoyed working through this paper, which has packed into it an enormous amount of very interesting material. Certainly, it stimulated far more thoughts than I now have time to comment on. But before proceeding to my more specific comments, let me share with you two broader thoughts which stood out by the time I reached the end of the paper. The first of these was to ask whether, as researchers and policy advisers, we can yet summarise what we have learned to date from stochastic simulation work, relative to what we think we know from deterministic simulations? We continue, of course, to be relatively uncertain about a number of structural equations and transmission mechanisms in our deterministic models. For what it’s worth, my own preliminary guess is that the stochastic work has probably stimulated us to think about important issues in somewhat different ways, rather than having yet led to greater confidence about particular policy rules or reaction functions. The second major question I was left with was: how does one take further the key result of the paper? This result is that increased monetary credibility leading to more stable output and inflation, will in general require the Central Bank to adjust its reaction function. I’ll comment briefly on this at the end. Finally by way of introduction, I can say that like the authors I found the credibility results more important and interesting than the slope of the Phillips curve and fiscal policy material. I’ll therefore bypass any comments I could make in those areas, in favour of a number of specific comments focussing on credibility. More credible monetary policy? The metric of credibility It’s well known that “credibility ” is a slippery concept to quantify, not the least because it is Central Bank credibility one is trying to capture. As acknowledged by the authors in their paper, the actual measures used are generally both imperfect and indirect (eg private forecasters ’ inflationary expectations). Not surprisingly then, I too saw the short sample empirical evidence for Canada in section 2.1 as not particularly convincing, apart perhaps from the evidence on bond yield differentials shown in figure 6.

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