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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.

Suggested Citation

  • Antonio Diez de los Rios, 2008. "McCallum Rules, Exchange Rates, and the Term Structure of Interest Rates," Staff Working Papers 08-43, Bank of Canada.
  • Handle: RePEc:bca:bocawp:08-43
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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," Staff Working Papers 12-5, Bank of Canada.

    More about this item

    Keywords

    Exchange rates; Interest rates; Transmission of monetary policy;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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