CAN FORECAST-BASED MONETARY-POLICY BE MORE SUCCESSFUL THAN A RULE

This study asks (1) how accurate must velocity forecasts be to permit formulation of monetary policy that would provide greater levels of ec onomic stability than McCallum's adaptive rule, (2) how might instabil ity increase when forecast-based monetary policy relies on successivel y less accurate forecasts of velocity, and (3) is the stability provid ed by McCallum's adaptive rule sensitive to the definition of money an d/or the length of the moving average period for velocity growth rates ? Results suggest that the greatest levels of economic stability would occur with a rule written for the monetary base utilizing the prior q uarter's velocity growth rate. One may conclude that for M1 and M2 rul es, small improvements in the accuracy of velocity forecasts are assoc iated with significant improvements in economic stability. For monetar y base rules the relationship between forecast accuracy and economic s tability is not as apparent.