McCallum Rules, Exchange Rates, and the Term Structure of Interest Rates

43 Pages Posted: 31 Oct 2008 Last revised: 24 Jan 2009

Date Written: December 1, 2008

Abstract

McCallum (1994a) proposes a monetary rule where policymakers have some tendency to resist rapid changes in exchange rates to explain the forward premium puzzle. We estimate this monetary policy reaction function within the framework of an affine term structure model to find that, contrary to previous estimates of this rule, the monetary authorities in Canada, Germany and the U.K. respond to nominal exchange rate movements. Our model is also able to replicate the forward premium puzzle.

Keywords: Interest rates, Exchange rates, Monetary policy rules

JEL Classification: E43, F31, G12, G15

Suggested Citation

Diez de los Rios, Antonio, McCallum Rules, Exchange Rates, and the Term Structure of Interest Rates (December 1, 2008). Available at SSRN: https://ssrn.com/abstract=1292698 or http://dx.doi.org/10.2139/ssrn.1292698

Antonio Diez de los Rios (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada