IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/0693.html
   My bibliography  Save this paper

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

Author

Listed:
  • Frederic S. Mishkin

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.

Suggested Citation

  • Frederic S. Mishkin, 1981. "Monetary Policy and Short-Term Interest Rates: An Efficient Markets-Rational Expectations Approach," NBER Working Papers 0693, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0693
    Note: EFG
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w0693.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Frederic S. Mishkin, 1978. "Efficient-Markets Theory: Implications for Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 707-752.
    2. Zellner, Arnold, 1979. "Causality and econometrics," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 10(1), pages 9-54, January.
    3. Feige, Edgar L & Pearce, Douglas K, 1976. "Economically Rational Expectations: Are Innovations in the Rate of Inflation Independent of Innovations in Measures of Monetary and Fiscal Policy?," Journal of Political Economy, University of Chicago Press, vol. 84(3), pages 499-522, June.
    4. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    5. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    6. Jacobs, Rodney L & Leamer, Edward E & Ward, Michael P, 1979. "Difficulties with Testing for Causation," Economic Inquiry, Western Economic Association International, vol. 17(3), pages 401-413, July.
    7. John A. Carlson, 1977. "A Study of Price Forecasts," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 6, number 1, pages 27-56, National Bureau of Economic Research, Inc.
    8. Fair, Ray C, 1978. "The Sensitivity of Fiscal Policy Effects to Assumptions about the Behavior of the Federal Reserve," Econometrica, Econometric Society, vol. 46(5), pages 1165-1179, September.
    9. Modigliani, Franco & Shiller, Robert J, 1973. "Inflation, Rational Expectations and the Term Structure of Interest Rates," Economica, London School of Economics and Political Science, vol. 40(157), pages 12-43, February.
    10. Fama, Eugene F., 1976. "Forward rates as predictors of future spot rates," Journal of Financial Economics, Elsevier, vol. 3(4), pages 361-377, October.
    11. Philip Cagan, 1972. "The Channels of Monetary Effects on Interest Rates," NBER Books, National Bureau of Economic Research, Inc, number caga72-1, March.
    12. Durbin, J, 1970. "Testing for Serial Correlation in Least-Squares Regression When Some of the Regressors are Lagged Dependent Variables," Econometrica, Econometric Society, vol. 38(3), pages 410-421, May.
    13. Mullineaux, Donald J, 1978. "On Testing for Rationality: Another Look at the Livingston Price Expectations Data," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 329-336, April.
    14. Shiller, Robert J, 1973. "Rational Expectations and the Term Structure of Interest Rates: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(3), pages 856-860, August.
    15. Feldstein, Martin S & Eckstein, Otto, 1970. "The Fundamental Determinants of the Interest Rate," The Review of Economics and Statistics, MIT Press, vol. 52(4), pages 363-375, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mishkin, Frederie S., 1981. "Monetary policy and long-term interest rates : An efficient markets approach," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 29-55.
    2. Mishkin, Frederic S, 1982. "Does Anticipated Monetary Policy Matter? An Econometric Investigation," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 22-51, February.
    3. Thomas Delcey & Francesco Sergi, 2019. "The Efficient Market Hypothesis and Rational Expectations. How Did They Meet and Live (Happily?) Ever After," Working Papers hal-02187362, HAL.
    4. Abel, Andrew B. & Mishkin, Frederic S., 1983. "An integrated view of tests of rationality, market efficiency and the short-run neutrality of monetary policy," Journal of Monetary Economics, Elsevier, vol. 11(1), pages 3-24.
    5. Rodney L. Jacobs, 1978. "An Examination of the Economic and Muthian Rationality of Price Level Forecasts," UCLA Economics Working Papers 135A, UCLA Department of Economics.
    6. Zdeněk Dvorný, 2004. "Efficiency of the Secondary T-Bill Market," Prague Economic Papers, Prague University of Economics and Business, vol. 2004(1), pages 17-25.
    7. Thomas Delcey & Francesco Sergi, 2019. "The Efficient Market Hypothesis and Rational Expectations. How Did They Meet and Live (Happily?) Ever After," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-02187362, HAL.
    8. Pearce, Douglas K & Roley, V Vance, 1985. "Stock Prices and Economic News," The Journal of Business, University of Chicago Press, vol. 58(1), pages 49-67, January.
    9. Berger, Allen N & Davies, Sally M & Flannery, Mark J, 2000. "Comparing Market and Supervisory Assessments of Bank Performance: Who Knows What When?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 641-667, August.
    10. Julian M. Alston & James A. Chalfant, 1987. "A Note on Causality Between Money, Wages and Prices in Australia," The Economic Record, The Economic Society of Australia, vol. 63(2), pages 115-119, June.
    11. Peter Saunders, 1981. "The Formation of Producers' Price Expectations in Australia," The Economic Record, The Economic Society of Australia, vol. 57(4), pages 368-378, December.
    12. Ali F. Darrat & Tarun K. Mukherjee, 1995. "Inter‐industry differences and the impact of operating and financial leverages on equity risk," Review of Financial Economics, John Wiley & Sons, vol. 4(2), pages 141-155, March.
    13. Sarker, Rakhal, 1990. "Testing Causality in Economics: A Review," Department of Agricultural Economics and Business 258629, University of Guelph.
    14. M. A. Akhtar, 1995. "Monetary Policy And Long‐Term Interest Rates: A Survey Of Empirical Literature," Contemporary Economic Policy, Western Economic Association International, vol. 13(3), pages 110-130, July.
    15. Silva Lopes, Artur, 1994. "A "hipótese das expectativas racionais": teoria e realidade (uma visita guiada à literatura até 1992) [The "rational expectations hypothesis": theory and reality (a guided tour ," MPRA Paper 9699, University Library of Munich, Germany, revised 23 Jul 2008.
    16. David S. Jones & V. Vance Roley, 1982. "Rational Expectations, the Expectations Hypothesis, and Treasury Bill Yields: An Econometric Analysis," NBER Working Papers 0869, National Bureau of Economic Research, Inc.
    17. James Chan-Lee, 1980. "A review of recent work in the area of inflationary expectations," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 116(1), pages 45-86, March.
    18. Darrat, Ali F. & Mukherjee, Tarun K., 1995. "Inter-industry differences and the impact of operating and financial leverages on equity risk," Review of Financial Economics, Elsevier, vol. 4(2), pages 141-155.
    19. Matteo Deleidi & Enrico Sergio Levrero, 2021. "Monetary policy and long‐term interest rates: Evidence from the U.S. economy," Metroeconomica, Wiley Blackwell, vol. 72(1), pages 121-147, February.
    20. Burton, Diana M. & Love, H. Alan, 1996. "A Review of Alternative Expectations Regimes in Commodity Markets: Specification, Estimation, and Hypothesis Testing Using Structural Models," Agricultural and Resource Economics Review, Cambridge University Press, vol. 25(2), pages 213-231, October.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0693. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.