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.


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.

  1. Gross Domestic Product - GDP

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

    The rate at which the general level of prices for goods and services ...
  3. Real Gross Domestic Product (GDP)

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

    The large set of inter-related economic production and consumption ...
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