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Lifting the veil of secrecy from monetary policy: evidence from the Fed's early discount rate policy

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  • Daniel L. Thornton

Abstract

Traditionally, monetary policy has been conducted under a veil of secrecy. In its landmark Freedom of Information Act case, the Federal Reserve argued that it needed to delay the disclosure of its policy decision, claiming that immediate disclosure would cause the market to overreact or react in a way that was inconsistent with the Fed's intentions. Based on this argument and others, the Fed was permitted to delay the release of FOMC policy decisions. Contrary to the Fed's assertion, most economists believe that market forces would work to keep equilibrium outcomes more in line with policy maker's intentions if policy makers would announce their intentions and establish a reputation for behaving in a manner consistent with them. This paper tests the hypothesis that the market responds more closely to the Fed's intentions when the Fed makes its intentions known by investigating the market's reaction to a change in discount rate policy in the 1960s. We find that the market responded in a manner inconsistent with the Fed's intentions when they were unknown, and responds in a manner consistent with them when the Fed made its intentions known.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1998-003.

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Date of creation: 1998
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Publication status: Published in Journal of Money, Credit, and Banking, May 2000, 32(2), pp. 155-67
Handle: RePEc:fip:fedlwp:1998-003

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Keywords: Discount ; Monetary policy - United States ; Rational expectations (Economic theory) ; Federal Open Market Committee;

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  1. Waud, Roger N, 1970. "Public Interpretation of Federal Reserve Discount Rate Changes: Evidence on the 'Announcement Effect'," Econometrica, Econometric Society, vol. 38(2), pages 231-50, March.
  2. Hakkio, Craig S. & Pearce, Douglas K., 1992. "Discount rate policy under alternative operating procedures: An empirical investigation," International Review of Economics & Finance, Elsevier, vol. 1(1), pages 55-72.
  3. Smirlock, Michael J & Yawitz, Jess B, 1985. " Asset Returns, Discount Rate Changes, and Market Efficiency," Journal of Finance, American Finance Association, vol. 40(4), pages 1141-58, September.
  4. Mark Rush & Gordon Sellon & Li Zhu, 1994. "The role of the discount rate in monetary policy," Research Working Paper 94-01, Federal Reserve Bank of Kansas City.
  5. Dallas S. Batten & Daniel L. Thornton, 1983. "Discount rate changes and the foreign exchange market," Working Papers 1983-016, Federal Reserve Bank of St. Louis.
  6. Michael J. Dueker, 1992. "The response of market interest rates to discount rate changes," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 78-91.
  7. Daniel L. Thornton, 1996. "The information content of discount rate announcements: what's behind the announcement effect?," Working Papers 1994-032, Federal Reserve Bank of St. Louis.
  8. Edward C. Simmons, 1956. "A Note On The Revival Of Federal Reserve Discount Policy," Journal of Finance, American Finance Association, vol. 11(4), pages 413-421, December.
  9. Goodfriend, Marvin, 1986. "Monetary mystique: Secrecy and central banking," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 63-92, January.
  10. Wagster, John, 1993. "The Information Content of Discount Rate Announcements Revisited: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 132-37, February.
  11. Warren L. Smith, 1958. "The Discount Rate as a Credit-Control Weapon," Journal of Political Economy, University of Chicago Press, vol. 66, pages 171.
  12. Cook, Timothy & Hahn, Thomas, 1988. "The Information Content of Discount Rate Announcements and Their Effect on Market Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 167-80, May.
  13. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
  14. V. Vance Roley & Rick Troll, 1984. "The impact of discount rate changes on market interest rates," Economic Review, Federal Reserve Bank of Kansas City, issue Jan, pages 27-39.
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Cited by:
  1. Daniel L. Thornton, 2000. "The relationship between the federal funds rate and the Fed's federal funds rate target: is it open market or open mouth operations?," Working Papers 1999-022, Federal Reserve Bank of St. Louis.
  2. Filippo COSSETTI & Francesco GUIDI, 2009. "ECB Monetary Policy and Term Structure of Interest Rates in the Euro Area: an Empirical Analysis," Working Papers 334, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  3. Turdaliev, Nurlan, 2010. "Communication in repeated monetary policy games," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 228-243, April.
  4. Jérôme Creel & Jacky Fayolle, 2002. "La Banque centrale et l'Union monétaire européennes : les tribulations de la crédibilité," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 211-244.
  5. Mohamed Z. M. Aazim & Nawalage S. Cooray, 2010. "Monetary Policy and Yield Curve Dynamics in an Emerging Market: Sri Lankan Perspectives," Working Papers EMS_2010_11, Research Institute, International University of Japan.
  6. Drakos, Konstantinos, 2001. "Monetary policy and the yield curve in an emerging market: the Greek case," Emerging Markets Review, Elsevier, vol. 2(3), pages 244-262, September.
  7. repec:spo:wpecon:info:hdl:2441/2942 is not listed on IDEAS

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