In memory of Ben McCallum

Bennett T. McCallum died December 28, 2022. Ben was a major contributor to macro and monetary economics, with important publications spanning 40 years. While his work touched on many topics, his papers on equilibrium determinacy in rational expectations models, monetary policy, interest rate rules, and the importance of robustness in designing policy rules were, I think, his most important. He offered insights into the theoretical implications of general equilibrium monetary models under rational expectations as well as practical guidance to the evaluation of policy rules.

My first interaction with Ben was when he was a discussant of the paper I presented at the 1982 Federal Reserve Bank of Kansas City Jackson Hole Symposium. Far from filling the large meeting room just off the Jackson Lake Lodge's lobby as it does now, in 1982 the whole event was held downstairs in modest room that felt like a basement.

It is interesting to look back at the 1982 Symposium and see what has changed and what has remained the same in terms of the featured topics. On the first day, Alan Blinder presented "Issues in the Coordination of Monetary and Fiscal Policy," and John Taylor presented "The Role of Expectations in the Choice of Monetary Policy," topics still discussed today.  The next day I offered a paper on "The Effects of Alternative Operating Procedures on Economic and Financial Relationships,"  Ed Kane presented "Selecting Monetary Targets in a Changing Financial Environment," and Ben Friedman presented "Using a Credit Aggregate Target to Implement Monetary Policy in the Financial Environment of the Future.” The second day papers reflected the debates of the time over instruments and targets for monetary policy. Nowadays it is taken for granted that central banks employ a short-term interest rate as their policy instrument and that targets should be for goals such as inflation, not for alternative definitions of reserves or monetary aggregates.

In looking back over Ben's discussion of my 1982 paper, I was struck by his concluding comments: "...recommending the use of equilibrium models is not the same as asserting that the behavior of the economy is well-described by flexible-price equilibrium models. As Taylor's (1982) paper for the conference points out, these models are difficult to reconcile with the data. What is needed is an extended equilibrium analysis that explains the existence and nature of nominal contracts and thus predicts how they will respond to changes in policy…The virtue of the equilibrium-analysis program is that it provides a particular form of analytical discipline, i.e., it encourages one to think carefully about the behavior of individual agents and about the way in which the actions of many such agents interact. This discipline is valuable...."

Recall that 1982 was the year Kydland and Prescott published "Time to build and aggregate fluctuations,” (Econometrica, 50:1345-1370), providing the foundation for real business cycle analysis based on equilibrium modeling approaches. Ben stressed that the use of equilibrium models did not preclude introducing nominal rigidities that both facilitated the study of monetary policy rules and helped to fit business cycle data. Since the early 1980s, economists in the new Keynesian tradition have made great strides in extending our understanding of the role of nominal rigidities. However, the profession has been less successful in addressing Ben’s call for explaining the existence of such rigidities.

Here is a very short and selective set of some of Ben’s important papers; the titles give a good sense of some of the topics he worked on:

McCallum, B.T. 1981. “Price Level Determinacy with an Interest Rate Policy Rule and Rational Expectations.”  Journal of Monetary Economics 8:319-329.

McCallum, B T. 1983. “On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective.” Journal of Monetary Economics 11 (2): 139–68.

McCallum, B.T. 1986. “Some Issues Concerning Interest Rate Pegging, Price Level Determinacy, and the Real Bills Doctrine.” Journal of Monetary Economics 17 (1): 135–60.

McCallum, B.T. 1988. “Robustness Properties of a Rule for Monetary Policy.” Carnegie-Rochester Conference Series on Public Policy 29: 173–204.

McCallum, B.T. 1999. “Issues in the Design of Monetary Policy Rules.” In Handbook of Macroeconomics, edited by J Taylor and M Woodford, 1483–1530. Vol. 1C, Amsterdam: Elsevier North-Holland.