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Lifting the veil of secrecy from monetary policy: evidence from the Fed's early discount rate policy

  • Daniel L. Thornton

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 decision, claiming that immediate disclosure would cause the market to overreact or 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. Contrary to the Fed's assertion, most economists 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 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.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1998-003.

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Date of creation: 1998
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Publication status: Published in Journal of Money, Credit, and Banking, May 2000, 32(2), pp. 155-67
Handle: RePEc:fip:fedlwp:1998-003
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  1. Dallas S. Batten & Daniel L. Thornton, 1983. "Discount rate changes and the foreign exchange market," Working Papers 1983-016, Federal Reserve Bank of St. Louis.
  2. Warren L. Smith, 1958. "The Discount Rate as a Credit-Control Weapon," Journal of Political Economy, University of Chicago Press, vol. 66, pages 171.
  3. Mark Rush & Gordon Sellon & Li Zhu, 1994. "The role of the discount rate in monetary policy," Research Working Paper 94-01, Federal Reserve Bank of Kansas City.
  4. 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.
  5. 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.
  6. Waud, Roger N, 1970. "Public Interpretation of Federal Reserve Discount Rate Changes: Evidence on the 'Announcement Effect'," Econometrica, Econometric Society, vol. 38(2), pages 231-50, March.
  7. 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 132-37, February.
  8. Michael J. Dueker, 1992. "The response of market interest rates to discount rate changes," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 78-91.
  9. 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 1141-58, September.
  10. 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 167-80, May.
  11. 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.
  12. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, June.
  13. Marvin Goodfriend, 1985. "Monetary mystique : secrecy and central banking," Working Paper 85-07, Federal Reserve Bank of Richmond.
  14. 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.
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