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

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Author Info
Antonio Diez de los Rios

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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/en/res/wp/2008/wp08-43.pdf
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Publisher 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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Related research
Keywords: Exchange rates; Interest rates; Transmission of monetary policy;

Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
F31 - International Economics - - International Finance - - - Foreign Exchange
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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This page was last updated on 2009-11-24.

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