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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

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

References

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  2. Ann-Marie Meulendyke, 1998. "U.S. monetary policy and financial markets," Monograph, Federal Reserve Bank of New York, number 1998mpaf.
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  18. 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.
  19. 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.
  20. 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.
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  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. Goldberg, Michael A., 1982. "The pricing of the prime rate," Journal of Banking & Finance, Elsevier, vol. 6(2), pages 277-296, June.
  24. 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.
  25. Michael J. Dueker, 2000. "Are prime rate changes asymmetric?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 33-40.
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  27. 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.
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Citations

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Cited by:
  1. 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.
  2. 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.
  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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