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Monetary Policy and Short-Term Interest Rates: An Efficient Markets-Rational Expectations Approach

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Frederic S. Mishkin

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Abstract

The impact of a money stock increase on nominal short-term interest rates has been a hotly debated issue in the monetary economics literature. The most commonly held view -- also a feature of most structural macro models--has an increase in the money stock leading, at least in the short-run, to a decline in short interest rates. Monetarists dispute this view because they believe that it ignores the dynamic effects of a money stock increase. This paper is an application of efficient markets-rational expectations theory to analyze empirically the relationship of money supply growth and short- term interest rates. This approach has the advantage over earlier research on this subject in that it imposes a theoretical structure that allows easier interpretation of the empirical results as well as more powerful statistical tests. In the interest of ascertaining the robustness of the results, many different empirical tests are carried out in this paper, and they uniformly do not support the proposition that increases in the money supply are correlated with declines in short rates.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0693.

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Date of creation: Aug 1982
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Handle: RePEc:nbr:nberwo:0693

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  1. Daniel L. Thornton, 1998. "The Federal Reserve's operating procedure, nonborrowed reserves, borrowed reserves and the liquidity effect," Working Papers 1998-009, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  2. repec:fip:fedreq:y:1985:i:mar:p:23-35:n:v.71no.2 is not listed on IDEAS
  3. Timothy Q. Cook & Thomas A. Lawler, 1983. "The behavior of the spread between Treasury bill rates and private money market rates since 1978," Working Paper 83-04, Federal Reserve Bank of Richmond. [Downloadable!]
  4. Arusha Cooray, 2003. "A test of the expectations hypothesis of the term structure of interest rates for Sri Lanka," Applied Economics, Taylor and Francis Journals, vol. 35(17), pages 1819-1827, November. [Downloadable!] (restricted)
  5. David S. Jones & V. Vance Roley, 1984. "Rational Expectations, the Expectations Hypothesis, and Treasury Bill Yields: An Econometric Analysis," NBER Working Papers 0869, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Karen K. Lewis, 1993. "Are Forign Exchange Intervention and Monetary Policy Related and Does it Really Matter?," NBER Working Papers 4377, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. V. Vance Roley, 1983. "The Response of Short-Term Interest Rates to Weekly Money Announcements," NBER Working Papers 1001, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. repec:fip:fedreq:y:1983:i:nov:p:3-15:n:v.69no.6 is not listed on IDEAS
  9. Martin Feldstein, 1985. "Should Private Pensions Be Indexed?," NBER Working Papers 0787, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Benjamin J. C. Kim & Noor A. Ghazali, 1998. "The Liquidity Effect Of Money Shocks On Short-Term Interest Rates: Some International Evidence," International Economic Journal, Korean International Economic Association, vol. 12(4), pages 49-63, December. [Downloadable!] (restricted)
  11. John H. Makin, 1982. "Money Surprises and Short-Term Interest Rates: Reconciling ContradictoryFindings," NBER Working Papers 0993, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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