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Monetary policy and real interest rates: new evidence from the money stock announcements

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  • William T. Gavin
  • Nicholas V. Karamouzis

Abstract

This paper presents new evidence on how asset prices respond to new information about the money stock. It shows that the information content of money stock announcements and the response of asset prices to new information in the announcements vary with changes in the monetary policy regime, the Federal Reserve operating procedures, and the reserve accounting rules. While previous studies have examined how asset prices respond to the money stock announcements under the interest-rate targeting procedure and the nonborrowed reserve procedure, we have included new evidence from the borrowed reserve targeting procedure under both lagged and contemporaneous reserve accounting rules. Looking at how both forward exchange rates and other asset prices respond to the announcements, we distinguish between periods when the asset-price response reflected a change in the real interest rate and those when it reflected a change in the inflation premium. Finally, we show that the new contemporaneous reserve accounting rules have greatly reduced the information content of the money stock announcements.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 8406.

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Date of creation: 1984
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Handle: RePEc:fip:fedcwp:8406

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Keywords: Monetary policy ; Money supply ; Bank reserves;

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Cited by:
  1. Michael T. Belongia & Richard G. Sheehan, 1985. "The efficient markets hypothesis and weekly money: some contrary evidence," Working Papers, Federal Reserve Bank of St. Louis 1985-004, Federal Reserve Bank of St. Louis.
  2. Timothy Cook & Thomas Hahn, 1990. "Interest rate expectations and the slope of the money market yield curve," Economic Review, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Sep, pages 3-26.
  3. Richard G. Sheehan & R.W. Hafer, 1987. "On the response of interest rates to unexpected weekly money: are policy changes important?," Working Papers, Federal Reserve Bank of St. Louis 1987-005, Federal Reserve Bank of St. Louis.
  4. Andreas Fischer, 1989. "Interpreting the Term Structure of Interest Rates Using Weekly Money Announcements," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), Swiss Society of Economics and Statistics (SSES), vol. 125(I), pages 43-53, March.
  5. Timothy Cook & Thomas Hahn, 1988. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Working Paper, Federal Reserve Bank of Richmond 88-04, Federal Reserve Bank of Richmond.
  6. V. Vance Roley, 1986. "U.S. Monetary Policy Regimes and U.S.-Japan Financial Relations," NBER Working Papers 1858, National Bureau of Economic Research, Inc.

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