Ed Nelson on the Life, Work, and Legacy of Bennett McCallum

Episode Summary

Executive Summary: A tribute episode honoring Bennett McCallum, tracing his life and major contributions to monetary economics through a wide-ranging conversation with former student and coauthor Ed Nelson. The discussion covers rational expectations, early empirical methods, monetary-policy rules, nominal GDP targeting, the McCallum rule, and McCallum’s pragmatic influence on central banking and macro policy debates.

Main Topics: Bennett McCallum’s life and career (Priority: 5/5): Beckworth opens with a biographical sketch: Texas roots, education at Rice, Harvard, and Rice again, then academic posts at UVA and Carnegie Mellon, plus ties to the Richmond Fed, NBER, Bank of Japan, and Reserve Bank of New Zealand. McCallum and the Rational Expectations Revolution (Priority: 5/5): Nelson explains McCallum’s immersion in Lucas, Muth, Sargent, and Seidner, highlighting his 1976 Econometrica paper as an early prototype of GMM-style estimation for forward-looking models. Interest-rate rules and the Taylor principle (Priority: 5/5): The conversation revisits McCallum’s 1981 paper arguing that interest-rate rules are viable if they place weight on a nominal target, foreshadowing later New Keynesian policy-rule work. The McCallum rule and nominal GDP targeting (Priority: 5/5): They discuss McCallum’s shift away from monetary aggregates after financial innovation, leading to a rule using the monetary base as an instrument to stabilize nominal income growth. Growth-rate targeting vs. level targeting (Priority: 4/5): Beckworth raises the distinction between nominal GDP level targeting and McCallum’s preference for growth-rate targeting; Nelson explains McCallum’s skepticism toward compensatory make-up policy for bygones. McCallum’s role as a bridge-builder in macroeconomics (Priority: 4/5): Multiple speakers emphasize his openness to different schools of thought, his policy relevance, and his use of simple, operational frameworks to communicate monetary economics to academics and central bankers. Personal memories and legacy (Priority: 3/5): Audience members share stories about his teaching, music, basketball, editing habits, and his ability to make technical ideas understandable and policy-relevant.

Key Arguments: McCallum’s 1976 Econometrica paper anticipated later GMM methods by showing how to estimate equations with expected future values using an instrumental-variables/two-stage approach. His 1981 work on interest-rate rules argued they are feasible when tied to nominal targets, helping lay groundwork for later Taylor-rule thinking. McCallum concluded by the early 1980s that strict monetary targeting was undermined by financial innovation, motivating a broader nominal-income targeting approach. The McCallum rule was designed as an instrument rule, using controllable policy instruments—especially the monetary base—to hit nominal income objectives in real time. McCallum favored growth-rate targeting over level targeting because level targets require harsh make-up actions after shocks and rely on uncertain estimates of potential output. He did not see monetary aggregates as obsolete in theory, but thought they were less operational in practice once financial innovation, currency flows, interest on reserves, and the zero lower bound complicated their use. McCallum was neither anti-New Keynesian nor anti-interest-rate-rule; instead, he sought compatibility across frameworks and used simple models to connect theory with policy practice. He was deeply committed to policy translation: the goal of modeling was not just elegance but improving real-world monetary policy decisions. His influence persisted at the Fed, the Bank of England, and the Bank of Japan, where his frameworks were used as benchmarks or advisory tools even when not adopted as formal policy rules.

Data Points: Year of birth: 1935 - Beckworth’s biographical overview of Bennett McCallum Marriage year: 1961 - McCallum met and married Sally while at Rice Chemical engineering work experience: 3 years - McCallum worked as a chemical engineer before returning to economics UVA tenure: 1960s to 1981 - He taught at the University of Virginia before moving to Carnegie Mellon Carnegie Mellon tenure: 1981 to 2016 - McCallum remained at Carnegie Mellon until retirement Conference commemorating McCallum: Late 2022 / recent monetary policy conference - The episode was recorded at a conference honoring McCallum after his death in late 2022 Econometrica paper year: 1976 - Nelson identifies McCallum’s paper on estimating rational expectations models as a major breakthrough JPE quote year: 1979 - McCallum used the phrase “bygones are, after all, bygones” in an article referenced by Nelson Interest-rate rule paper year: 1981 - McCallum’s rebuttal to Sargent-Wallace on interest-rate rules Nominal-income-targeting paper year: 1984 - AA proceedings paper arguing for something broader than constant money growth McCallum-rule formulation year: 1988 - He expressed the rule using the monetary base as the instrument Nominal-income growth preference year: 1999 - McCallum stated growth-rate targets appeared more desirable than growing level targets McCallum rule conference year: 1992 - Beckworth notes a conference dedicated to the McCallum rule before the Taylor rule became dominant MBA/Harvard period: Mid-1960s - Beckworth’s overview notes Harvard as the point where McCallum’s interest in economics was whetted Bank of England use: As a cross-check in briefing materials - Nelson says the McCallum rule was included in Monetary Policy Committee briefings Japan advisory role: Late 1990s - An audience member notes McCallum advised the Bank of Japan on escaping the zero lower bound

Pivotal Quotes: "“We all are, except for Ed.”" — Ben McCallum: Nelson recounts McCallum joking about economists being self-educated through reading and immersion "“Interest rate rules are viable if some weight is given to a nominal target.”" — Ed Nelson quoting McCallum: Summary of McCallum’s 1981 critique of Sargent-Wallace and his view of rule-based policy "“The irrelevance of bygones is one of the most fundamental propositions in economics.”" — Ben McCallum: Used to explain his skepticism toward make-up policy and level-targeting logic

Implications: McCallum’s legacy is a pragmatic, rules-based monetary framework that still informs central-bank thinking. His work shows that policy design can bridge monetarist and New Keynesian ideas while staying operational and empirically grounded.