McCallum Rule - Explained
What is the McCallum Rule?
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What is the McCallum Rule?
The McCallum rule is a monetary policy rule that specifies the level of the monetary base a central bank can maintain in a country. This rule explains the interaction between the total amount in the monetary base and a country's inflation. Bennett T. McCallum proposed the McCallum Rule towards the end of the 20thcentury. It is a guideline that stipulates how a central bank can keep its monetary base in balance. The McCallum Rule is also a targeting rule that helps the central bank set target for monetary base and also know when intervention is needed.
Back to: ECONOMIC ANALYSIS & MONETARY POLICY
How does the McCallum Rule Apply?
Bennett T. McCallum developed the McCallum Rule in the papers he wrote between the late 1980s and 1990. This rule is a targeting rule that helps the central bank of a country to develop a target for its monetary base and also know when intervention is needed in their currency. The intervention needed could be a monetary policy that will cause a change in interest rates. The McCallum Rule is a type of nominal Gross Domestic Product (NGDP) targeting rule that enhances stability in an economy. There are diverse targeting rules that help control inflation or economic growth, NGDP targeting rules focus on the interaction of several factors to maintain balance in the economy. The McCallum rule explains the interaction between the monetary base of a country and the inflation rate.
Strengths and Weaknesses of the McCallum Rule
The major strengths of the McCallum Rule lie in its ability to drive stability in a country by limiting inflation. McCallum Rule contributes to rapid economic growth and improves economic activity. The drawback of the McCallum Rule, according to the critics of this rule is that it results in too much stability and excess stability results in excess spending and less saving.
McCallum Rule vs Taylor Rule
The McCallum rule is often contrasted with Taylor, another economic targeting rule developed by John B. Taylor in 1993. Dale W. Henderson and Warwick McKibbin also contributed to the development of the Taylor rule. The Taylor rule helps central banks to control growth and inflation. Like the McCallum Rule, the Taylor rule describes economic behaviors and relationships. While the McCallum Rule explains how a country's inflation and the total amount of monetary base interact, the Taylor rule explains the interaction between a country's inflation and the federal funds rate. Both the Taylor rule and the McCallum rule are considered rival rules with respect to how a central bank can control inflation and economic growth.
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