McCallum Rule

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.

BREAKING DOWN '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. Inflation Targeting

    A central banking policy that revolves around meeting preset, ...
  2. Inflation Trade

    A method of investing that seeks to profit from an overall increase ...
  3. Inflation

    The rate at which the general level of prices for goods and services ...
  4. Real Economic Growth Rate

    A measure of economic growth from one period to another expressed ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
  6. Core Inflation

    A measure of inflation that excludes certain items that face ...
Related Articles
  1. Investing Basics

    Inflation's Impact On Stock Returns

    When stocks are divided into growth and value categories, the evidence is clear that value stocks perform better in periods of high inflation, and growth stocks perform better during periods ...
  2. Economics

    Is U.S. Inflation on the Horizon?

    Inflation, or the general price level of all goods and services in an economy, has remained subdued in the years following the Great Recession. Given recent developments, is the U.S. on the verge ...
  3. Economics

    Macroeconomics: Inflation

    By Stephen Simpson Inflation is a key concept in macroeconomics, and a major concern for government policymakers, companies, workers and investors. Inflation refers to a broad increase in prices ...
  4. Bonds & Fixed Income

    Coping With Inflation Risk

    Inflation is less dramatic than a crash, but it can be more devastating to your portfolio.
  5. Fundamental Analysis

    What Causes Inflation in the United States

    Inflation is the main catalyst behind U.S monetary policy. But what causes this phenomenon of sustained rising prices? Read on to find out.
  6. Retirement

    Inflation: Inflation And Investments

    When it comes to inflation, the question on many investors' minds is: "How will it affect my investments?" This is an especially important issue for people living on a fixed income, such as retirees. ...
  7. Economics

    The Delicate Dance of Inflation and GDP

    Investors must understand inflation and gross domestic product, or GDP, well enough to make decisions without becoming buried in data.
  8. Economics

    Should You Worry About the U.S Inflation rate?

    Understand how inflation is measured, how U.S. inflation compares to other countries, and if investors should be concerned with rising inflation.
  9. Savings

    Inflation for Dummies

    Inflation may seem like a straightforward concept, but it is more complex than it appears. We examine its varieties and causes.
  10. Investing Basics

    How Inflation Policy Affects You

    The Fed estimates a long-term goal of 2% inflation for the near future. Learn how that'll impact you.
RELATED FAQS
  1. How is the Macaulay duration related to fixed income markets?

    Determine how monetary policy influences the Fisher effect. The Fisher effect is used to determine real interest rates which ... Read Answer >>
  2. What is the relationship between inflation and interest rates?

    Inflation and interest rates are linked, and frequently referenced in macroeconomics. Inflation refers to the rate at which ... Read Answer >>
  3. Why are P/E ratios generally higher during times of low inflation?

    Inflation affects equity prices in several ways. Most importantly, investors are willing to pay less for a certain level ... Read Answer >>
  4. How does inflation affect fixed-income investments?

    Learn about the ways inflation can harm fixed-income investments. Find out how to monitor the impact of inflation using common ... Read Answer >>
  5. What is the difference between the cost of living and the cost of inflation?

    Increases in the general price level is called inflation, whereas cost of living is an estimate of the cost of an average ... Read Answer >>
  6. What is the difference between inflation and stagflation?

    Inflation is a term used by economists to define broad increases in prices. Inflation is the rate at which the price of goods ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center