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Why Do T-Bill Rates React to Discount Rate Changes?

  • Thornton, Daniel L

A number of alternative explanations for the response of T-bill rates to discount rate changes have been offered in the literature. This paper investigates Cook and Hahn's (1988) hypothesis that discount rate changes signal a change in the Fed's federal funds rate target which, in turn, induce changes in T-bill rates. After showing that the evidence that theyt claim supports their view cannot be used to differentiate their hypothesis from equally plausible alternatives, we show that a valid alternative test fails to provide support for their view and that discount rate changes do not appear to signal changes in the target for the funds rate. Copyright 1994 by Ohio State University Press.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 26 (1994)
Issue (Month): 4 (November)
Pages: 839-50

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Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:4:p:839-50
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Fama, Eugene F., 1986. "Term premiums and default premiums in money markets," Journal of Financial Economics, Elsevier, vol. 17(1), pages 175-196, September.
  2. Mankiw, N Gregory & Miron, Jeffrey A, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 211-28, May.
  3. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Cowles Foundation Discussion Papers 667, Cowles Foundation for Research in Economics, Yale University.
  4. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January.
  5. Smirlock, Michael J & Yawitz, Jess B, 1985. " Asset Returns, Discount Rate Changes, and Market Efficiency," Journal of Finance, American Finance Association, vol. 40(4), pages 1141-58, September.
  6. Poole, William, 1991. "Interest rates and the conduct of monetary policy : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 31-39, January.
  7. 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.
  8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  9. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 99-125, January.
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