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

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  • Thornton, Daniel L

Abstract

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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  • Thornton, Daniel L, 1994. "Why Do T-Bill Rates React to Discount Rate Changes?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 839-850, November.
    • Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:4:p:839-50
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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. 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.
    3. Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(1), pages 99-125.
    4. N. Gregory Mankiw & Jeffrey A. Miron, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(2), pages 211-228.
    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 1141-1158, September.
    6. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    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 167-180, May.
    8. Warren L. Smith, 1958. "The Discount Rate as a Credit-Control Weapon," Journal of Political Economy, University of Chicago Press, vol. 66, pages 171-171.
    9. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 173-224.
    10. 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.
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    Cited by:

    1. Hardy, Daniel C., 1996. "Market reaction to changes in German official interest rates," Discussion Paper Series 1: Economic Studies 1996,04, Deutsche Bundesbank.
    2. Sastry, D. V. S. & Singh, Balwant & Bhattacharya, Kaushik, 2009. "Stability of Lending Rate Stickiness: A Case Study of India," MPRA Paper 26570, University Library of Munich, Germany.
    3. Gasbarro, Dominic & Monroe, Gary S., 2004. "The impact of monetary policy candidness on Australian financial markets," Journal of Multinational Financial Management, Elsevier, vol. 14(1), pages 35-46, February.
    4. Muhammad Yasir, 2015. "Investigating the Real Shocks in the Discount Rate of Pakistan," South Asian Journal of Management Sciences (SAJMS), Iqra University, Iqra University, vol. 9(1), pages 10-14, Spring.
    5. Galindo, Arturo J. & Maloney, William F., 2002. "Second moments in speculative attack models: panel evidence," Journal of International Economics, Elsevier, vol. 56(1), pages 97-129, January.
    6. Choi, Woon Gyu, 1999. "Estimating the Discount Rate Policy Reaction Function of the Monetary Authority," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(4), pages 379-401, July-Aug..
    7. 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.
    8. 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.
    9. Kaketsis, Asimakis & Sarantis, Nicholas, 2006. "The effects of monetary policy changes on market interest rates in Greece: An event study approach," International Review of Economics & Finance, Elsevier, vol. 15(4), pages 487-504.
    10. 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.

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