Announcements and the effectiveness of monetary policy: A view from the US prime rate
Until 1994, the US prime rate was said to be sticky because of its irresponsiveness to short-term interest rates. After the Fed started the practice of announcing its intended funds rate in 1994, however, the prime rate has come to react immediately to shifts in the target rate. This paper attempts to explain how the Fed's policy announcements changed the behavior of the prime rate by using a simple menu cost model. It shows that an increase in the expected duration of funds rate targets was essential to the improvement in the target rate pass-through.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- Carl E. Walsh, 2008.
"Announcements and the role of policy guidance,"
Federal Reserve Bank of St. Louis, issue Jul, pages 421-442.
- James Payne & George Waters, 2008. "Interest rate pass through and asymmetric adjustment: evidence from the federal funds rate operating target period," Applied Economics, Taylor & Francis Journals, vol. 40(11), pages 1355-1362.
- de Goeij, P. C. & Marquering, W., 2006. "Macroeconomic announcements and asymmetric volatility in bond returns," Other publications TiSEM bc4389f3-bad2-4e5b-b996-3, Tilburg University, School of Economics and Management.
- Oscar Jorda & James D. Hamilton, 2003.
"A model for the federal funds rate target,"
997, University of California, Davis, Department of Economics.
- James D. Hamilton & Oscar Jorda, 2000. "A Model for the Federal Funds Rate Target," NBER Working Papers 7847, National Bureau of Economic Research, Inc.
- James D. Hamilton & Oscar Jorda, . "A model for the federal funds rate target," Department of Economics 99-07, California Davis - Department of Economics.
- Rudebusch, Glenn D., 1995.
"Federal Reserve interest rate targeting, rational expectations, and the term structure,"
Journal of Monetary Economics,
Elsevier, vol. 35(2), pages 245-274, April.
- 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.
- Selva Demiralp & Oscar Jorda, .
"The Announcement Effect: Evidence from Open Market Desk Data,"
Department of Economics
01-04, California Davis - Department of Economics.
- Selva Demiralp & Òscar Jordà, 2002. "The announcement effect: evidence from open market desk data," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 29-48.
- Oscar Jorda & Selva Demiralp & Holly Liu & Jeffrey Williams, 2003. "The Announcement Effect: Evidence from Open Market Desk Data," Working Papers 14, University of California, Davis, Department of Economics.
- William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
- Mester, Loretta J. & Saunders, Anthony, 1995.
"When does the prime rate change?,"
Journal of Banking & Finance,
Elsevier, vol. 19(5), pages 743-764, August.
- Nautz, Dieter & Schmidt, Sandra, 2009.
"Monetary policy implementation and the federal funds rate,"
Journal of Banking & Finance,
Elsevier, vol. 33(7), pages 1274-1284, July.
- Nautz, Dieter & Schmidt, Sandra, 2008. "Monetary Policy Implementation and the Federal Funds Rate," ZEW Discussion Papers 08-025, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Antulio N. Bomfim & Vincent Reinhart, 2000. "Making news: financial market effects of Federal Reserve disclosure practices," Finance and Economics Discussion Series 2000-14, Board of Governors of the Federal Reserve System (U.S.).
- Tokhir Mirzoev, 2004. "Limited Commitment, Inaction and Optimal Monetary Policy," Macroeconomics 0409027, EconWPA.
- Lange, Joe & Sack, Brian & Whitesell, William, 2003. " Anticipations of Monetary Policy in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 889-909, December.
- Guthrie, Graeme & Wright, Julian, 2000. "Open mouth operations," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 489-516, October.
- Daniel L. Thornton, 2005. "When did the FOMC begin targeting the federal funds rate? what the verbatim transcripts tell us," Working Papers 2004-015, Federal Reserve Bank of St. Louis.
- Liu, Ming-Hua & Margaritis, Dimitri & Tourani-Rad, Alireza, 2008. "Monetary policy transparency and pass-through of retail interest rates," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 501-511, April.
- John B. Taylor, 2001. "Expectations, open market operations, and changes in the federal funds rate," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 33-58.
- Michael J. Dueker, 2000. "Are prime rate changes asymmetric?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 33-40.
- Michael J. Dueker & Daniel L. Thornton, 1994. "Asymmetry in the prime rate and firms' preference for internal finance," Working Papers 1994-017, Federal Reserve Bank of St. Louis.
- Daniel L. Thornton, 2005. "A new federal funds rate target series: September 27, 1982, - December 31, 1993," Working Papers 2005-032, Federal Reserve Bank of St. Louis.
- Demiralp, Selva & Jorda, Oscar, 2004. "The Response of Term Rates to Fed Announcements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 387-405, June.
- Swanson, Eric T., 2006. "Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 791-819, April.
- George E. Monahan, 1982. "State of the Art---A Survey of Partially Observable Markov Decision Processes: Theory, Models, and Algorithms," Management Science, INFORMS, vol. 28(1), pages 1-16, January.
- Kleimeier, Stefanie & Sander, Harald, 2006. "Expected versus unexpected monetary policy impulses and interest rate pass-through in euro-zone retail banking markets," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1839-1870, July.
- de Goeij, Peter & Marquering, Wessel, 2006. "Macroeconomic announcements and asymmetric volatility in bond returns," Journal of Banking & Finance, Elsevier, vol. 30(10), pages 2659-2680, October.
- Goldberg, Michael A., 1982. "The pricing of the prime rate," Journal of Banking & Finance, Elsevier, vol. 6(2), pages 277-296, June.
- Ann-Marie Meulendyke, 1998. "U.S. monetary policy and financial markets," Monograph, Federal Reserve Bank of New York, number 1998mpaf.
- Forbes, Shawn M. & Mayne, Lucille S., 1989. "A friction model of the prime," Journal of Banking & Finance, Elsevier, vol. 13(1), pages 127-135, March.
- Thornton, Daniel L., 2004. "The Fed and short-term rates: Is it open market operations, open mouth operations or interest rate smoothing?," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 475-498, March.
When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:33:y:2009:i:12:p:2253-2266. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.