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The Information Content of German Discount Rate Changes

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Author Info

  • Manfred J.M. Neumann

    (University of Bonn)

  • Jens Weidmann

    (University of Bonn)

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    Abstract

    Discount rate changes always receive considerable attention in financial markets. Two hypotheses compete to explain financial market reactions: the direct ‘borrowing cost effect’ and the announcement effect. This paper examines the issue for the Bundesbank’s discount rate changes after 1979. Summing up we find that market reactions cannot be attributed to a direct borrowing cost effect but exclusively to announcement effects. The empirical results indicate that interest rates react to changes in the discount rate to the extent that they are unanticipated. In contrast, the response to anticipated changes in the discount rate is small and insignificant. We proxy market anticipations by a multinomial logit-model combined with a dummy variable capturing non-quantifiable factors reported by the financial press. Moreover, we show that the response of interest rates declines along the term structure and with the switch to greater emphasis on repurchase operations in early 1985.

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    File URL: http://128.118.178.162/eps/mac/papers/9706/9706006.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Macroeconomics with number 9706006.

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    Length: 21 pages
    Date of creation: 13 Jun 1997
    Date of revision:
    Handle: RePEc:wpa:wuwpma:9706006

    Note: Type of Document - PDF; prepared on IBM PC; pages: 21 ; figures: included
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    Web page: http://128.118.178.162

    Related research

    Keywords: discount rate; Bundesbank; announcement effects;

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    References

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    1. Murphy, Kevin M & Topel, Robert H, 1985. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(4), pages 370-79, October.
    2. V. Vance Roley & Rick Troll, 1984. "The impact of discount rate changes on market interest rates," Economic Review, Federal Reserve Bank of Kansas City, issue Jan, pages 27-39.
    3. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
    4. Cook, Timothy & Hahn, Thomas, 1988. "The Information Content of Discount Rate Announcements and Their Effect on Market Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 167-80, May.
    5. Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
    6. Michael J. Dueker, 1992. "The response of market interest rates to discount rate changes," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 78-91.
    7. Lombra, Raymond E & Torto, Raymond G, 1977. "Discount Rate Changes and Announcement Effects," The Quarterly Journal of Economics, MIT Press, vol. 91(1), pages 171-76, February.
    8. Hakkio, Craig S. & Pearce, Douglas K., 1992. "Discount rate policy under alternative operating procedures: An empirical investigation," International Review of Economics & Finance, Elsevier, vol. 1(1), pages 55-72.
    9. Craig S. Hakkio & Douglas K. Pearce, 1986. "Exchange rates and discount rate changes," Research Working Paper 86-06, Federal Reserve Bank of Kansas City.
    10. Daniel L. Thornton, 1982. "The discount rate and market interest rates: what's the connection?," Review, Federal Reserve Bank of St. Louis, issue Jun, pages 3-14.
    11. Daniel L. Thornton, 1996. "The information content of discount rate announcements: what's behind the announcement effect?," Working Papers 1994-032, Federal Reserve Bank of St. Louis.
    12. R.W. Hafer, 1986. "The response of stock prices to changes in weekly money and the discount rate," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 5-14.
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