McCallum Rule

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Definition: McCallum Rule

The economist Bennett T. Mccallum made a monetary policy development guideline called Mccallum Rule. This defines the relationship between inflation and the change in the money supply needed to create for this level of inflation. This rule inputs the target inflation rate and average growth rate in Real GDP terms.

The rule says:



mt= Natural logarithm of Monetary base

vt-16 = the average quarterly increase of the velocity of monetary base over a four-year period from t-16 to t;

pd= desired rate of inflation, i.e. the preferred quarterly increase in the price level’s natural logarithm;

q= the long-run average quarterly increase of the real GDP’s natural logarithm

xt-1= the quarterly increase of the nominal GDP’s natural logarithm from t-1 to t.

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