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The Announcement Effect: Evidence from Open Market Desk Data

  • Oscar Jorda
  • Selva Demiralp
  • Holly Liu
  • Jeffrey Williams

    (Department of Economics, University of California Davis)

This paper investigates the ability of the Federal Reserve to manipulate the overnight rate without open market operations (which Demiralp and Jorda (2000) term the announcement effect), using high-frequency, open-market-desk data. Using similar data, Hamilton (1997) takes advantage of forecast errors in the Treasury balance to compute the elasticity of the federal funds rate to these errors and thus to obtain a measure of the liquidity effect. Similarly, one can view daily deviations of the federal funds rate from target as forecast errors in the reserve need (see Taylor, 2000). By analyzing the manner and the type of operation the Fed uses to maintain the federal funds rate close to its targeted value and by observing the pattern of operations on the days surrounding a change in this target, we provide evidence of the announcement effect. Furthermore, we show that the discipline of the FOMC schedule dictates, not only the process of expectations formation in the overnight rate, but also the price adjustment process of term rates.

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Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 14.

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Length: 39
Date of creation: 16 Jan 2003
Date of revision:
Handle: RePEc:cda:wpaper:01-4
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  1. 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.
  2. James D. Hamilton & Oscar Jorda, 2002. "A Model of the Federal Funds Rate Target," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1135-1167, October.
  3. Daniel L. Thornton, 2001. "Identifying the liquidity effect at the daily frequency," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 59-82.
  4. Richard G. Anderson & Robert H. Rasche, 2000. "Retail sweep programs and bank reserves, 1994--1999," Working Papers 2000-023, Federal Reserve Bank of St. Louis.
  5. H. Robert Heller, 1988. "Implementing monetary policy," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 419-429.
  6. Cheryl L. Edwards, 1997. "Open market operations in the 1990s," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 859-874.
  7. Leonardo Bartolini & Giuseppe Bertola & Alessandro Prati, 2000. "Day-to-day monetary policy and the volatility of the federal funds interest rate," Staff Reports 110, Federal Reserve Bank of New York.
  8. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April.
  9. Peter R. Fisher & Spence Hilton, 1999. "Highlights of domestic open market operations during 1998," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Apr, pages 217-235.
  10. John B. Taylor, 2001. "Expectations, open market operations, and changes in the federal funds rate," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 33-58.
  11. Marvin Goodfriend & William Whelpley, 1998. "Federal funds," Monograph, Federal Reserve Bank of Richmond, number 1998f.
  12. Michael Woodford, 2000. "Monetary Policy in a World Without Money," NBER Working Papers 7853, National Bureau of Economic Research, Inc.
  13. Hamilton, James D, 1997. "Measuring the Liquidity Effect," American Economic Review, American Economic Association, vol. 87(1), pages 80-97, March.
  14. Feinman, Joshua N, 1993. "Estimating the Open Market Desk's Daily Reaction Function," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 231-47, May.
  15. Guthrie, Graeme & Wright, Julian, 2000. "Open mouth operations," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 489-516, October.
  16. Peter R. Fisher & Gerald D. Cohen, 1996. "Domestic open market operations during 1996," Annual Report Domestic Open Market Operations, Federal Reserve Bank of New York.
  17. R. Alton Gilbert, 1985. "Operating procedures for conducting monetary policy," Review, Federal Reserve Bank of St. Louis, issue Feb.
  18. Furfine, Craig H., 2000. "Interbank payments and the daily federal funds rate," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 535-553, October.
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