Monetary Policy Announcements and Money Markets: A Transatlantic Perspective

This paper investigates how money markets in the USA, Germany (up to 1998) and the euro area (since 1999) react to monetary policy announcements by the Federal Reserve, Bundesbank and ECB. We find that interest rates respond strongly to domestic monetary policy throughout, whereas the response to foreign monetary policy varies across markets and over time: both the German and the euro area market react to Federal Reserve announcements, whereas US markets do not generally respond to European monetary policy. Whereas announcements by the Bundesbank increased the volatility of German money markets, such effects are rarely found for the ECB, and have basically disappeared for the Federal Reserve. Moreover, the general linkage of money markets has increased considerably over time: interest rate developments and volatility in either the USA or the euro area are generally mirrored in the other market to a much larger extent than prior to EMU. We interpret these results as evidence that euro area and US markets not only have become more interdependent over time, but that the markets' understanding and anticipation of monetary policy decisions have improved over time. Copyright 2003 by Blackwell Publishers Ltd.