SPECIFICATION OF POLICY RULES AND PERFORMANCE-MEASURES IN MULTICOUNTRY SIMULATION STUDIES

Much recent analysis of international monetary and fiscal policy issue s has been conducted by stochastic simulations with multicountry econo metric models. In these studies it has become standard practice to con sider alternative policy rules of a form that calls for departures of a policy instrument, from some 'baseline' reference path, that are pro portional to deviations of a specified target variable from its own ba seline path. The present paper argues that this standard rule form is seriously defective for such issues because the implied rules often fa il to be operational and have associated performance measures that can be misleading in important cases.