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McCallum Rules, Exchange Rates, and the Term Structure of Interest Rates

Antonio Diez de los Rios ()

Staff Working Papers from Bank of Canada

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.

Keywords: Exchange rates; Interest rates; Transmission of monetary policy (search for similar items in EconPapers)
JEL-codes: E43 F31 G12 G15 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:08-43

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