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. Economy

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

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

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

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

    A gross domestic product (GDP) figure that has not been adjusted ...
  6. Real Gross Domestic Product (GDP)

    An inflation-adjusted measure that reflects the value of all ...
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. China's GDP Examined: A Service-Sector ...
    Economics

    China's GDP Examined: A Service-Sector ...

  4. Main Characteristics of Capitalist Economies
    Economics

    Main Characteristics of Capitalist Economies

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center