The stabilizing properties of a nominal GNP rule : a comment

In a recent paper Frankel and Chinn ( 1995)(hereafter FC) examine the stabilizing properties of a number of different policy rules. Within the context of their model one of their major conclusions is in error. Specifically, the conclusion that in an open economy "the nominal GNP rule unambiguously dominates the money rule" (Frankel and Chinn 1995, p. 326) is incorrect. The reason for the mistaken conclusion of FC has to do with an error in their expression for expected loss under a Nominal GNP Rule. It will be shown below that terms involving the variance of velocity shocks are inappropriately missing from their expression for expected loss.