3 How does rule of the instrument sometimes lead to the sele

3. How does \"rule of the instrument\" sometimes lead to the selection of an inappropriate statistical test and how can it have a negative effect on services to clients?

Solution

McCallum and Nelson\'s (2004) criticism of targeting rules for the analysis of monetary policy is rebutted. First, McCallum and Nelson\'s preference to study the robustness of simple monetary-policy rules is no reason at all to limit attention to simple instrument rules; simple targeting rules may have more desirable properties. Second, optimal targeting rules are a compact, robust, and structural description of goal-directed monetary policy, analogous to the compact, robust, and structural consumption Euler conditions in the theory of consumption. They express the very robust condition of equality of the marginal rates of substitution and transformation between the central bank\'s target variables. Third, under realistic information assumptions, the instrument-rule analogue to any targeting rule that McCallum and Nelson have proposed results in very large instrument-rate volatility and is also for other reasons inferior to a targeting rule.

suppose we assume H0 as particular product price remain same in next year

against

H1: particular product price increse in next year

on the basis of samle and test statistics if H0 rejects but when it is acctually true then it is a negative effect for such test