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Monetary Policy Regimes, Expected Inflation, and the Response of Interest Rates to Money Announcements

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V. Vance Roley
Carl E. Walsh

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Abstract

This paper examines the response of the term structure of interest rates to weekly money announcements. Estimated responses for both the pre- and post-October 1979 periods are first presented. Then, two competing hypotheses involving the policy anticipations and expected inflation effects are formally specified and compared to the estimated responses.Both hypotheses are found to be consistent with the responses, but they have sharply different implications about the Federal Reserve's short-run monetary policy. The expected inflation hypothesis implies that weekly money surprises should have persistent effects on the level of the money stock, reflecting shifts in the Federal Reserve's long-run target. In contrast, the policy anticipations hypothesis implies that the effectof money surprises should diminish over time, reflecting the Federal Reserve's desire to offset deviations from target. Additional empirical results reported in the paper support this latter description of the money stock process.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1181.

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Date of creation: Aug 1986
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Handle: RePEc:nbr:nberwo:1181

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Roley, V Vance, 1983. "The Response of Short-Term Interest Rates to Weekly Money Announcements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(3), pages 344-54, August. [Downloadable!] (restricted)
  2. 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)
  3. Carl E. Walsh, 1982. "Interest Rate Volatility and Monetary Policy," NBER Working Papers 0915, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. McCallum, Bennett T & Hoehn, James G, 1983. "Instrument Choice for Money Stock Control with Contemporaneous and Lagged Reserve Requirements: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(1), pages 96-101, February. [Downloadable!] (restricted)
  5. Grossman, Jacob, 1981. "The "Rationality" of Money Supply Expectations and the Short-Run Response of Interest Rates to Monetary Surprises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(4), pages 409-24, November. [Downloadable!] (restricted)
  6. Cornell, Bradford, 1983. "Money Supply Announcements and Interest Rates: Another View," Journal of Business, University of Chicago Press, vol. 56(1), pages 1-23, January. [Downloadable!] (restricted)
  7. Nelson, Charles R & Schwert, G William, 1977. "Short-Term Interest Rates as Predictors of Inflation: On Testing the Hypothesis That the Real Rate of Interest is Constant," American Economic Review, American Economic Association, vol. 67(3), pages 478-86, June. [Downloadable!] (restricted)
  8. Charles Engel & Jeffrey A. Frankel, 1984. "Why Money Announcements Move Interest Rates: An Answer from the Foreign Exchange Market," NBER Working Papers 1049, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Gibbons, Michael R & Hess, Patrick, 1981. "Day of the Week Effects and Asset Returns," Journal of Business, University of Chicago Press, vol. 54(4), pages 579-96, October. [Downloadable!] (restricted)
  10. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-82, June. [Downloadable!] (restricted)
  11. V. Vance Roley & Rick Troll, 1983. "The impact of new economic information on the volatility of short-term interest rates," Economic Review, Federal Reserve Bank of Kansas City, issue Feb, pages 3-15. [Downloadable!]
  12. Nichols, Donald A & Small, David H & Webster, Charles E, Jr, 1983. "Why Interest Rates Rise When an Unexpectedly Large Money Stock Is Announced," American Economic Review, American Economic Association, vol. 73(3), pages 383-88, June. [Downloadable!] (restricted)
  13. V. Vance Roley, 1982. "Weekly money supply announcements and the volatility of short-term interest rates," Economic Review, Federal Reserve Bank of Kansas City, issue Apr, pages 3-15. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. repec:fip:fedreq:y:1990:i:sep:p:3-26:n:v.76no.5 is not listed on IDEAS
  2. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Research Paper 9706, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  3. Richard Deaves & Angelo Melino & James E. Pesando, 1987. "The Response of Interest Rates to the Federal Reserve's Weekly Money Announcements: The "Puzzle" of Anticipated Money," NBER Working Papers 2125, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. V. Vance Roley, 1986. "Money Demand Predictability," NBER Working Papers 1580, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Carl E. Walsh, 1987. "The Impact of Monetary Targeting in the United States: 1976-1984," NBER Working Papers 2384, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Bedri Tas, 2004. "Private information of the Fed, predictability of stock returns and expected monetary policy," Money Macro and Finance (MMF) Research Group Conference 2003 100, Money Macro and Finance Research Group. [Downloadable!]
  7. Guido Tabellini, 1986. "Secrecy of Monetary Policy and the Variability of Interest Rates," UCLA Economics Working Papers 426, UCLA Department of Economics. [Downloadable!]
    Other versions:
  8. Michael J. Fleming & Eli M. Remolona, 1999. "The term structure of announcement effects," Staff Reports 76, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  9. Peter R. Hartley & Carl E. Walsh, 1986. "Inside Money and Monetary Neutrality," NBER Working Papers 1890, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. John Y. Campbell, 1987. "Money Announcements, the Demand for Bank Reserves and the Behavior of the Federal Funds Rate Within the Statement Week," NBER Working Papers 1806, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Erwin W. Heri, 1988. "Money Demand Regressions and Monetary Targeting Theory and Stylized Evidence," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 124(II), pages 123-149, June. [Downloadable!]
  12. 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), vol. 125(I), pages 43-53, March. [Downloadable!]
  13. R. W. Hafer, 1985. "Further evidence on stock price response to changes in weekly money and the discount rate," Working Papers 1985-015, Federal Reserve Bank of St. Louis. [Downloadable!]
  14. Grant McQueen & V. Vance Roley, 1990. "Stock Prices, News, and Business Conditions," NBER Working Papers 3520, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. V. Vance Roley, 1987. "U.S. Monetary Policy Regimes and U.S.-Japan Financial Relations," NBER Working Papers 1858, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Lucio Sarno & Daniel L. Thornton, 2003. "The efficient market hypothesis and identification in structural VARs," Working Papers 2003-032, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
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