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Monetary policy, secrecy, and federal funds rate behavior

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  • Michael Dotsey
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    Abstract

    The behavior of the Federal Reserve System can be characterized as secretive with respect to its control of monetary aggregates. One common justification for this secrecy is that markets will overreact to information, causing undue variability in interest rates. However, the consequences of keeping policy objectives hidden has received little formal attention. This paper takes an initial step by examining the variability of the federal funds rate and total reserves under nonborrowed reserve targeting. The major result is that the disclosure of operating procedures will generally increase the unconditional variability of both the funds rate and total reserves, but will decrease the variance of the forecasting error of the federal funds rate.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 85-04.

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    Date of creation: 1985
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    Handle: RePEc:fip:fedrwp:85-04

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    Keywords: Monetary policy ; Federal funds;

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    1. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-88, August.
    2. Dotsey, Michael & King, Robert G, 1986. "Informational Implications of Interest Rate Rules," American Economic Review, American Economic Association, vol. 76(1), pages 33-42, March.
    3. Robert L. Hetzel, 1984. "The formulation of monetary policy," Working Paper 84-02, Federal Reserve Bank of Richmond.
    4. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
    5. Axilrod, Stephen H & Lindsey, David E, 1981. "Federal Reserve System Implementation of Monetary Policy: Analytical Foundations of the New Approach," American Economic Review, American Economic Association, vol. 71(2), pages 246-52, May.
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    Cited by:
    1. Guido Tabellini, 1986. "Secrecy of Monetary Policy and the Variability of Interest Rates," UCLA Economics Working Papers 426, UCLA Department of Economics.
    2. Goodfriend, Marvin, 1986. "Monetary mystique: Secrecy and central banking," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 63-92, January.

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