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Monetary policy surprises and interest rates: Evidence from the Fed funds futures market

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  • Kuttner, Kenneth N.

Abstract

This paper estimates the impact of monetary policy actions on bill, note, and bond yields, using data from the futures market for federal funds to separate changes in the target funds rate into anticipated and unanticipated components. Bond rates' response to anticipated changes is essentially zero, while their response to unanticipated movements is large and highly significant. Surprise policy actions have little effect on near-term expectations of future actions, which helps explain the failure of the expectations hypothesis on the short end of the yield curve.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 47 (2001)
Issue (Month): 3 (June)
Pages: 523-544

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Handle: RePEc:eee:moneco:v:47:y:2001:i:3:p:523-544

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-48, November.
  2. V. Vance Roley & Gordon H. Sellon, Jr., 1995. "Monetary policy actions and long-term interest rates," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 73-89.
  3. Cook, Timothy & Hahn, Thomas, 1989. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Journal of Monetary Economics, Elsevier, Elsevier, vol. 24(3), pages 331-351, November.
  4. Michael J. Fleming & Eli M Remolona, 1999. "The term structure of announcement effects," BIS Working Papers 71, Bank for International Settlements.
  5. Charles L. Evans & Kenneth N. Kuttner, 1998. "Can VAR's describe monetary policy?," Working Paper Series, Federal Reserve Bank of Chicago WP-98-19, Federal Reserve Bank of Chicago.
  6. Brunner, Allan D, 2000. "On the Derivation of Monetary Policy Shocks: Should We Throw the VAR Out with the Bath Water?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 32(2), pages 254-79, May.
  7. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, Elsevier, vol. 35(2), pages 245-274, April.
  8. Glenn D. Rudebusch, 1996. "Do measures of monetary policy in a VAR make sense?," Working Papers in Applied Economic Theory 96-05, Federal Reserve Bank of San Francisco.
  9. Yash P. Mehra, 1996. "Monetary policy and long-term interest rates," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Sum, pages 27-49.
  10. Charles L. Evans & David A. Marshall, 1997. "Monetary policy and the term structure of nominal interest rates: evidence and theory," Working Paper Series, Macroeconomic Issues WP-97-10, Federal Reserve Bank of Chicago.
  11. Antulio N. Bomfim & Vincent R. Reinhart, 2000. "Making news: financial market effects of Federal Reserve disclosure practices," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2000-14, Board of Governors of the Federal Reserve System (U.S.).
  12. Wendy Edelberg & David Marshall, 1996. "Monetary policy shocks and long-term interest rates," Economic Perspectives, Federal Reserve Bank of Chicago, issue Mar, pages 2-17.
  13. Joel T. Krueger & Kenneth N. Kuttner, 1995. "The Fed funds futures rate as a predictor of Federal Reserve policy," Working Paper Series, Macroeconomic Issues 95-4, Federal Reserve Bank of Chicago.
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