Stochastic Simulation of Monetary Rules in Two Macroeconometric Models

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Abstract
The effects of different monetary rules on the rates of inflation and unemployment are studied by stochastic simulation of the Federal Reserve Board-MIT-Pennsylvania (FMP) Econometric Model and the St. Louis “Monetarist” Model. A number of heuristic and more formal statistical methods are used in evaluating the results. It is shown that simple feedback control rules—involving proportional and derivative controls—reduce the variability of the target variables relative to the rule in which the money supply is increased at a constant rate. The improvement is considerably greater in the St. Louis model than in the FMP model.