Why do market interest rates respond to money announcements?
A number of studies have attempted to determine why money market interest rates are positively correlated with unanticipated increases in the money stock by examining the response of the foreign exchange and stock markets to money announcements. They report a significant positive relationship between the trade-weighted exchange rate and unanticipated increases in the money stock and a significant negative relationship between unanticipated increases in the money stock and stock prices. These results are taken as evidence in favor of the "unanticipated-liquidity-effect" explanation of the money market's response. This paper analyzes the response of these markets and investigates the consistency of the response to unanticipated changes in the money stock across markets. We find that the results for the foreign exchange and stock markets are sensitive to a few "outliers" so that these markets do not respond strongly to unanticipated changes in the money stock. Furthermore, all three markets generally do not respond significantly to the same money announcements. We conclude that the often-cited evidence is not sufficient to differentiate the anticipated–liquidity–effect from competing explanations of the money market's response to unanticipated changes in the money stock.
|Date of creation:||1988|
|Date of revision:|
|Publication status:||Published in Journal of International Financial Markets, Institutions and Money, 1991, 1(1), pp. 33-60|
|Contact details of provider:|| Postal: P.O. Box 442, St. Louis, MO 63166|
Web page: http://www.stlouisfed.org/
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- R. W. Hafer, 1986. "The response of stock prices to changes in weekly money and the discount rate," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 5-14.
- Daniel L. Thornton, 1988. "The borrowed-reserves operating procedures: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 30-54.
- Hakkio, Craig S & Pearce, Douglas K, 1985. "The Reaction of Exchange Rates to Economic News," Economic Inquiry, Western Economic Association International, vol. 23(4), pages 621-36, October.
- Hardouvelis, Gikas A., 1987. "Macroeconomic information and stock prices," Journal of Economics and Business, Elsevier, vol. 39(2), pages 131-140, May.
When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:1988-002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.