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Lifting the Veil of Secrecy from Monetary Policy: Evidence from the Fed's Early Discount Rate Policy


  • Thornton, Daniel L


Traditionally, monetary policy has been conducted under a veil of secrecy. In its landmark Freedom of Information Act case, the Federal Reserve argued that it needed to delay the disclosure of its policy decisions, claiming that immediate disclosure would cause the market to react in a way that was inconsistent with the Fed's intentions. Based on this argument and others, the Fed was permitted to delay the release of FOMC policy decisions. Most economists, however, believe that market forces would work to keep equilibrium outcomes more in line with policy maker's intentions if policy makers would announce their intentions and establish a reputation for behaving in a manner consistent with them. This paper tests the hypothesis that the market responds more closely to the Fed's intentions when the Fed makes its intentions known by investigating the market's reaction to a change in discount rate policy in the early 1960s. We find that the market responded in a manner inconsistent with the Fed's intentions when they were unknown, and responds in a manner consistent with them when the Fed made its intentions known.

Suggested Citation

  • Thornton, Daniel L, 2000. "Lifting the Veil of Secrecy from Monetary Policy: Evidence from the Fed's Early Discount Rate Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(2), pages 155-167, May.
  • Handle: RePEc:mcb:jmoncb:v:32:y:2000:i:2:p:155-67

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    References listed on IDEAS

    1. V. Vance Roley & Rick Troll, 1984. "The impact of discount rate changes on market interest rates," Economic Review, Federal Reserve Bank of Kansas City, issue Jan, pages 27-39.
    2. 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.
    3. 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.
    4. 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.
    5. Batten, Dallas S. & Thornton, Daniel L., 1984. "Discount rate changes and the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 279-292, December.
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    8. Edward C. Simmons, 1956. "A Note On The Revival Of Federal Reserve Discount Policy," Journal of Finance, American Finance Association, vol. 11(4), pages 413-421, December.
    9. Wagster, John, 1993. "The Information Content of Discount Rate Announcements Revisited: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 132-137, February.
    10. Goodfriend, Marvin, 1986. "Monetary mystique: Secrecy and central banking," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 63-92, January.
    11. Waud, Roger N, 1970. "Public Interpretation of Federal Reserve Discount Rate Changes: Evidence on the 'Announcement Effect'," Econometrica, Econometric Society, vol. 38(2), pages 231-250, March.
    12. Hakkio, Craig S. & Pearce, Douglas K., 1992. "Discount rate policy under alternative operating procedures: An empirical investigation," International Review of Economics & Finance, Elsevier, vol. 1(1), pages 55-72.
    13. Robert V. Roosa, 1959. "Credit Policy at the Discount Window: Comment," The Quarterly Journal of Economics, Oxford University Press, vol. 73(2), pages 333-337.
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    Cited by:

    1. Filippo COSSETTI & Francesco GUIDI, 2009. "ECB Monetary Policy and Term Structure of Interest Rates in the Euro Area: an Empirical Analysis," Working Papers 334, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    2. Drakos, Konstantinos, 2001. "Monetary policy and the yield curve in an emerging market: the Greek case," Emerging Markets Review, Elsevier, vol. 2(3), pages 244-262, September.
    3. Jérôme Creel & Jacky Fayolle, 2002. "La Banque centrale et l'Union monétaire européennes : les tribulations de la crédibilité," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 211-244.
    4. repec:spo:wpecon:info:hdl:2441/2942 is not listed on IDEAS
    5. Thornton, Daniel L., 2000. "The relationship between the federal funds rate and the Fed's federal funds rate target: is it open market or open mouth operations?," Discussion Paper Series 1: Economic Studies 2000,09, Deutsche Bundesbank.
    6. Turdaliev, Nurlan, 2010. "Communication in repeated monetary policy games," International Review of Economics & Finance, Elsevier, vol. 19(2), pages 228-243, April.
    7. Craig S. Hakkio & Gordon H. Sellon, 2000. "The discount window : time for reform?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 1-20.
    8. Mohamed Z. M. Aazim & Nawalage S. Cooray, 2010. "Monetary Policy and Yield Curve Dynamics in an Emerging Market: Sri Lankan Perspectives," Working Papers EMS_2010_11, Research Institute, International University of Japan.

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