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Developing a Market-Based Monetary Policy Transparency Index and Testing Its Impact on Risk and Volatility in the United States

This paper extends the literature by developing an objective market-based index, which is dynamic and continuous and can be used to measure the monetary policy transparency for a country or, simultaneously, a series of countries. It was found that the agents in the money market are forward looking and that the more transparent the monetary policy is, the less risky and volatile the money market will be. Furthermore, during the tenure of Chairman Greenspan, the volatility and risk in the money market fell. The policy regime changes of adjusting the target rate by multiples of 25 or 50 basis points and including a balance-of-risks sentence in FOMC statements also resulted in a reduction in volatility in money markets.

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File URL: http://www.carleton.ca/economics/wp-content/uploads/cep05-02.pdf
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Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 05-02.

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Length: 52 pages
Date of creation: 21 Feb 2005
Date of revision:
Publication status: Published: Carleton Economic Papers
Handle: RePEc:car:carecp:05-02
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