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Announcements and the effectiveness of monetary policy: A view from the US prime rate

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  • Kobayashi, Teruyoshi

Abstract

Until 1994, the US prime rate was said to be sticky because of its irresponsiveness to short-term interest rates. After the Fed started the practice of announcing its intended funds rate in 1994, however, the prime rate has come to react immediately to shifts in the target rate. This paper attempts to explain how the Fed's policy announcements changed the behavior of the prime rate by using a simple menu cost model. It shows that an increase in the expected duration of funds rate targets was essential to the improvement in the target rate pass-through.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 33 (2009)
Issue (Month): 12 (December)
Pages: 2253-2266

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Handle: RePEc:eee:jbfina:v:33:y:2009:i:12:p:2253-2266

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Prime rate Federal funds rate Policy transmission Transparency Menu costs;

References

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  1. de Goeij, Peter & Marquering, Wessel, 2006. "Macroeconomic announcements and asymmetric volatility in bond returns," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2659-2680, October.
  2. Demiralp, Selva & Jorda, Oscar, 2001. "The Announcement Effect: Evidence from Open Market Desk Data," Working Papers 01-4, University of California at Davis, Department of Economics.
  3. Kleimeier, Stefanie & Sander, Harald, 2006. "Expected versus unexpected monetary policy impulses and interest rate pass-through in euro-zone retail banking markets," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1839-1870, July.
  4. James D. Hamilton & Oscar Jorda, 2000. "A Model for the Federal Funds Rate Target," NBER Working Papers 7847, National Bureau of Economic Research, Inc.
  5. Loretta J. Mester & Anthony Saunders, 1990. "When does the prime rate change?," Working Papers 90-16, Federal Reserve Bank of Philadelphia.
  6. Swanson, Eric T., 2006. "Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 791-819, April.
  7. John B. Taylor, 2001. "Expectations, open market operations, and changes in the federal funds rate," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 33-58.
  8. Carl E. Walsh, 2008. "Announcements and the role of policy guidance," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 421-442.
  9. Demiralp, Selva & Jorda, Oscar, 2004. "The Response of Term Rates to Fed Announcements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 387-405, June.
  10. Forbes, Shawn M. & Mayne, Lucille S., 1989. "A friction model of the prime," Journal of Banking & Finance, Elsevier, vol. 13(1), pages 127-135, March.
  11. George E. Monahan, 1982. "State of the Art---A Survey of Partially Observable Markov Decision Processes: Theory, Models, and Algorithms," Management Science, INFORMS, vol. 28(1), pages 1-16, January.
  12. Goldberg, Michael A., 1982. "The pricing of the prime rate," Journal of Banking & Finance, Elsevier, vol. 6(2), pages 277-296, June.
  13. Goeij, P. C. de & Marquering, W., 2006. "Macroeconomic announcements and asymmetric volatility in bond returns," Open Access publications from Tilburg University urn:nbn:nl:ui:12-194710, Tilburg University.
  14. Ann-Marie Meulendyke, . "U.S. monetary policy and financial markets," Monograph, Federal Reserve Bank of New York, number 1998mpaf.
  15. Lange, Joe & Sack, Brian & Whitesell, William, 2003. " Anticipations of Monetary Policy in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 889-909, December.
  16. Thornton, Daniel L., 2004. "The Fed and short-term rates: Is it open market operations, open mouth operations or interest rate smoothing?," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 475-498, March.
  17. Nautz, Dieter & Schmidt, Sandra, 2008. "Monetary Policy Implementation and the Federal Funds Rate," ZEW Discussion Papers 08-025, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  18. Liu, Ming-Hua & Margaritis, Dimitri & Tourani-Rad, Alireza, 2008. "Monetary policy transparency and pass-through of retail interest rates," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 501-511, April.
  19. Antulio N. Bomfim & Vincent R. Reinhart, 2000. "Making news: financial market effects of Federal Reserve disclosure practices," Finance and Economics Discussion Series 2000-14, Board of Governors of the Federal Reserve System (U.S.).
  20. Tokhir Mirzoev, 2004. "Limited Commitment, Inaction and Optimal Monetary Policy," Macroeconomics 0409027, EconWPA.
  21. James Payne & George Waters, 2008. "Interest rate pass through and asymmetric adjustment: evidence from the federal funds rate operating target period," Applied Economics, Taylor and Francis Journals, vol. 40(11), pages 1355-1362.
  22. William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
  23. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
  24. Guthrie, Graeme & Wright, Julian, 2000. "Open mouth operations," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 489-516, October.
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Citations

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Cited by:
  1. Chong, Beng Soon, 2010. "Interest rate deregulation: Monetary policy efficacy and rate rigidity," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1299-1307, June.
  2. Judit Montoriol-Garriga & J. Christina Wang, 2011. "The Great Recession and bank lending to small businesses," Working Papers 11-16, Federal Reserve Bank of Boston.
  3. Hussain, Syed Mujahid, 2011. "Simultaneous monetary policy announcements and international stock markets response: An intraday analysis," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 752-764, March.

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