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Monetary Policy Surprises and Interest Rates: Choosing between the Inflation-Revelation and Excess Sensitivity Hypotheses

  • Willem Thorbecke

    ()

    (George Mason University, and Senior Fellow, Research Institute of Economy, Trade and Industry, 1-3-1 Kasumigaseki, Chiyoda-ku, Tokyo 100-8901, Japan)

  • Hanjiang Zhang

    ()

    (Department of Finance, McCombs School of Business, University of Texas at Austin, 1 University Station B6000, Austin, TX 78712 USA)

Romer and Romer (2000) reported that federal funds rate increases may raise expected inflation by revealing the Federal Reserve’s private information about inflation. Gurkaynak, Sack, and Swanson (2005a) presented evidence that funds rate increases lowered long-term expected inflation. To choose between these hypotheses, we examine how monetary policy surprises affect daily traded commodity prices, term interest rates, and forward interest rates. We find that funds rate increases in the 1970s raised gold and silver prices and that increases after 1989 lowered gold and silver prices. We also find that funds rate hikes over both sample periods primarily affected short-term interest rates and near-term forward rates. For the 1970s, these results suggest that Romer and Romer’s explanation is correct. For recent years, they indicate that funds rate increases affect real rates and may also be consistent with the findings of Gu¨rkaynak, Sack, and Swanson.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 75 (2009)
Issue (Month): 4 (April)
Pages: 1114-1122

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Handle: RePEc:sej:ancoec:v:75:4:y:2009:p:1114-1122
Contact details of provider: Web page: http://www.southerneconomic.org/

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  1. Refet Gurkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," Macroeconomics 0504013, EconWPA.
  2. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2003. "The excess sensitivity of long-term interest rates: evidence and implications for macroeconomic models," Finance and Economics Discussion Series 2003-50, Board of Governors of the Federal Reserve System (U.S.).
  3. Campbell, John, 1995. "Some Lessons from the Yield Curve," Scholarly Articles 3163264, Harvard University Department of Economics.
  4. Frankel, Jeffrey A & Hardouvelis, Gikas A, 1985. "Commodity Prices, Money Surprises and Fed Credibility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 425-38, November.
  5. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
  6. Hardouvelis, G.A. & Barnhart, S.W., 1989. "The Evolution Of Federal Reserve Credibility: 1978-1984," Papers fb-_88-16, Columbia - Graduate School of Business.
  7. Jeffrey A. Frankel, 2006. "The Effect of Monetary Policy on Real Commodity Prices," NBER Working Papers 12713, National Bureau of Economic Research, Inc.
  8. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," NBER Working Papers 5893, National Bureau of Economic Research, Inc.
  9. Kenneth N. Kuttner, 2000. "Monetary policy surprises and interest rates: evidence from the Fed funds futures markets," Staff Reports 99, Federal Reserve Bank of New York.
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