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

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  • Antonio Diez de los Rios

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.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp08-43.pdf
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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 08-43.

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Length: 49 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:bca:bocawp:08-43

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Keywords: Exchange rates; Interest rates; Transmission of monetary policy;

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Cited by:
  1. Gregory H. Bauer & Antonio Diez de los Rios, 2012. "An International Dynamic Term Structure Model with Economic Restrictions and Unspanned Risks," Working Papers 12-5, Bank of Canada.

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