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Secrecy of Monetary Policy and the Variability of Interest Rates

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  • Tabellini, Guido

Abstract

This paper addresses the issue of how secrecy of the short-run monetary policy objectives affects the behavior of the federal-funds rate. Secrecy is modeled by assuming that financial markets are unc ertain about a parameter in the Federal Reserve reaction function. Th ey learn over time about this parameter, by means of Bayes rule, and this learning process is reflected in the time path of interest rates and of reserve aggregates. The main result of the paper is that secr ecy tends to increase the volatility of the funds rate and of reserve aggregates. Copyright 1987 by Ohio State University Press.

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  • Tabellini, Guido, 1987. "Secrecy of Monetary Policy and the Variability of Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(4), pages 425-436, November.
  • Handle: RePEc:mcb:jmoncb:v:19:y:1987:i:4:p:425-36
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    1. Cyert, Richard M & DeGroot, Morris H, 1974. "Rational Expectations and Bayesian Analysis," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 521-536, May/June.
    2. Tabellini, Guido, 1988. "Learning and the volatility of exchange rates," Journal of International Money and Finance, Elsevier, vol. 7(2), pages 243-250, June.
    3. Michael Dotsey, 1985. "Monetary policy, secrecy, and federal funds rate behavior," Working Paper 85-04, Federal Reserve Bank of Richmond.
    4. V. Vance Roley & Carl E. Walsh, 1985. "Monetary Policy Regimes, Expected Inflation, and the Response of Interest Rates to Money Announcements," The Quarterly Journal of Economics, Oxford University Press, vol. 100(Supplemen), pages 1011-1039.
    5. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
    6. 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 383-388, June.
    7. Marvin Goodfriend & Gary S. Anderson & Anil K. Kashyap & George R. Moore & Richard D. Porter, 1984. "A weekly perfect foresight model of the nonborrowed reserve operating procedure," Working Paper 84-04, Federal Reserve Bank of Richmond.
    8. Marvin Goodfriend, 1986. "A weekly rational expectations model of the nonborrowed reserve operating procedure," Economic Review, Federal Reserve Bank of Richmond, issue Jan, pages 11-28.
    9. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
    10. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
    11. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-574, May.
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    Cited by:

    1. Winkler, Bernhard, 2000. "Which kind of transparency? On the need for clarity in monetary policy-making," Working Paper Series 0026, European Central Bank.
    2. Lee, Jim, 2002. "Federal funds rate target changes and interest rate volatility," Journal of Economics and Business, Elsevier, vol. 54(2), pages 159-191.
    3. Vitale, Paolo, 2000. "Speculative noise trading and manipulation in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 19(5), pages 689-712, October.
    4. Amir Kia, 2005. "Developing a Market-Based Monetary Policy Transparency Index and Testing Its Impact on Risk and Volatility in the United States," Carleton Economic Papers 05-02, Carleton University, Department of Economics.
    5. Andrew G Haldane & Vicky Read, 2000. "Monetary policy surprises and the yield curve," Bank of England working papers 106, Bank of England.
    6. repec:eee:ecofin:v:42:y:2017:i:c:p:597-617 is not listed on IDEAS
    7. Amir KIA, "undated". "Developing a Market-Based Monetary Policy Transparency Index and Testing Its Impact on Risk and Volatility in the United States," EcoMod2009 21500052, EcoMod.
    8. Haslag, Joseph H., 2000. "On Fed watching and central bank transparency in an overlapping generations model," Working Papers 0002, Federal Reserve Bank of Dallas, revised 20 Jul 2001.
    9. Matthew Rafferty & Marc Tomljanovich, 2002. "Central bank transparency and market efficiency: An econometric analysis," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 26(2), pages 150-161, June.
    10. Muller, P. & M. Zelmer, 1999. "Greater Transparency in Monetary Policy: Impact on Financial Markets," Technical Reports 86, Bank of Canada.
    11. Eijffinger, Sylvester C.W. & Geraats, Petra M., 2006. "How transparent are central banks?," European Journal of Political Economy, Elsevier, vol. 22(1), pages 1-21, March.
    12. Carin van der Cruijsen & Sylvester Eijffinger, 2007. "The economic impact of central bank transparency: a survey," DNB Working Papers 132, Netherlands Central Bank, Research Department.
    13. C.J.M. Kool & S. Rosenkranz & M. Middeldorp, 2007. "Listening Without Understanding : Central Bank Transparency, Financial Markets and the Crowding Out of Private Information," Working Papers 07-19, Utrecht School of Economics.
    14. Nathan Balke & Joseph H. Haslag, 1989. "Asymmetric information and the role of FED watching," Working Papers 8903, Federal Reserve Bank of Dallas.
    15. TUYSUZ, Sukriye, 2007. "Central Bank transparency and the U.S. interest rates level and volatility response to U.S. news," MPRA Paper 5217, University Library of Munich, Germany.
    16. Wilson, Berry & Saunders, Anthony, 2004. "Monetary secrecy and selective disclosure: The emerging market case of Mexico's monetary reporting," Review of Financial Economics, Elsevier, vol. 13(1-2), pages 199-210.
    17. Marc Bassoni & André Cartapanis, 1995. "Autonomie des banques centrales et performances macro-économiques : Un réexamen," Revue Économique, Programme National Persée, vol. 46(2), pages 415-432.
    18. Vitale, Paolo, 1999. "Sterilised central bank intervention in the foreign exchange market," Journal of International Economics, Elsevier, vol. 49(2), pages 245-267, December.
    19. Aleksandar Murdzhev & Marc Tomljanovich, 2006. "What Color is Alan Greenspan's Tie? How Central Bank Policy Announcements Have Changed Financial Markets," Eastern Economic Journal, Eastern Economic Association, vol. 32(4), pages 571-593, Fall.
    20. Andrew G Haldane, 1997. "Designing Inflation Targets," RBA Annual Conference Volume,in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
    21. Mariusz Jarmuzek & Lucjan T. Orlowski & Artur Radziwill, 2004. "Monetary Policy Transparency in Inflation Targeting Countries: the Czech Republic, Hungary and Poland," CASE Network Studies and Analyses 0281, CASE-Center for Social and Economic Research.
    22. van der Cruijsen, C.A.B., 2008. "The economic impact of central bank transparency," Other publications TiSEM 86c1ba91-1952-45b4-adac-8, Tilburg University, School of Economics and Management.
    23. Amir Kia & Hilde Patron, 2004. "Market-Based Monetary Policy Transparency Index, Risk and Volatility - The Case of the United States," Carleton Economic Papers 04-07, Carleton University, Department of Economics.

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