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Central Bank transparency and the U.S. interest rates level and volatility response to U.S. news

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Author Info
TUYSUZ, Sukriye

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Abstract

This paper investigates the impact of U.S. macroeconomic and monetary news on market interest rate level and volatility. These news relate to Federal Reserve System (FED) target variables and unexpected policy rate changes. It examines whether the fact that FED announces its policy rate decisions immediately after each Federal Open Market Committee (FOMC) meeting alters the market rate response. These meetings occur regularly at scheduled time since February 1994. It also checks if this transparency measure (i.e. announcing the policy rate immediately after the meetings and regularly at scheduled time) has increased the predictability of FED's rates by the market. The results reveal that after 1994, financial markets can better foresee monetary policy decisions compared to the period when the policy rate was announced with a delay of 45 days after the meetings. Moreover, U.S. interest rate volatility is less affected by the announcements on FED target variables after 1994. In the same way, unexpected monetary policy decisions influence less interest rate level. These results suggest that, in accordance with theory, a greater transparency improves market participants' understanding of the Federal Reserve's monetary policy reaction function. Interestingly, the date on which FED announces the policy rate decision has a greater impact on U.S. interest rate volatility after 1994. This observation suggests that the FED's credibility might have decreased after 1994. However, it is not related to the immediate diffusion of policy rate decisions.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5217.

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Date of creation: 15 Sep 2007
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Handle: RePEc:pra:mprapa:5217

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Related research
Keywords: Monetary policy; news announcements; transparency; term structure of interest rates; EGARCH;

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates

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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. Tuysuz, Sukriye, 2007. "The asymmetric impact of macroeconomic announcements on U.S. Government bond rate level and volatility," MPRA Paper 5381, University Library of Munich, Germany. [Downloadable!]
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