McCallum Rule

AAA

DEFINITION of 'McCallum Rule'

A monetary policy development guideline developed by economist Bennett T. McCallum. The rule describes the relationship between inflation and the growth in the money supply needed to create that level of inflation. Important inputs in this model are the target inflation rate and the long-term average rate of growth in real GDP.

INVESTOPEDIA EXPLAINS 'McCallum Rule'

When the economic statistics of the 1970s are used to back-test the McCallum rule, it shows that at least part of the effect that contributed to that era's economic downturn was the fact that it grew too rapidly, which ultimately lead to high levels of inflation.

However, the McCallum rule only describes one part of the story, as other economic models determined that the interest rates set by the Fed were also too low. Because the cost of borrowing was not high enough, individuals would simply borrow to spend instead of saving.

RELATED TERMS
  1. Real Gross Domestic Product (GDP)

    An inflation-adjusted measure that reflects the value of all ...
  2. Economy

    The large set of inter-related economic production and consumption ...
  3. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced ...
  4. Inflation

    The rate at which the general level of prices for goods and services ...
  5. Recession

    A significant decline in activity across the economy, lasting ...
  6. Nominal GDP

    A gross domestic product (GDP) figure that has not been adjusted ...
Related Articles
  1. Curbing The Effects Of Inflation
    Bonds & Fixed Income

    Curbing The Effects Of Inflation

  2. The Importance Of Inflation And GDP
    Economics

    The Importance Of Inflation And GDP

  3. How Is Europe Affecting The Martkets?
    Economics

    How Is Europe Affecting The Martkets?

  4. Eyeing China? Consider These Economic ...
    Economics

    Eyeing China? Consider These Economic ...

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center