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: Suggested Citation
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