In monetary policy, the McCallum rule specifies a target for the monetary base (M0) which could be used by a central bank. The McCallum rule was proposed by Bennett T. McCallum at Carnegie Mellon University's Tepper School of Business. It is an alternative to the well known Taylor rule and according to its proponents, it performs better during crisis periods.

The rule gives a target for the monetary base in the next quarter (about 13 weeks). The target is:

where

Let us define the velocity of (base) money, V, by

where: M is the money supply (in our case, the monetary base, M0); and X is the aggregate money traded for goods or services (in our case, the nominal GDP for the quarter in question).

Let us define the price level, P, (in our case, the GDP deflator divided by 100) by

where Q is the quantity of goods or services exchanged (in our case, the real GDP during the quarter).

Together, these definitions yield the so-called equation of exchange