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The Pavlovian Response of Term Rates to Fed Announcements

  • Selva Demiralp
  • Oscar Jorda

The traditional view of the monetary transmission mechanism rests on the premise that the Federal Reserve (Fed) controls the level of the Federal funds rate via open market operations and the liquidity effect. By contrast, this paper argues that the Fed also manipulates the Federal funds rate via public disclosures of the new level of the Federal funds rate target and the "announcement effect.'' We define the announcement effect as the portion of interest rate movements associated with public statements on interest rate targets that do not require conventional open market operations for their support. This paper provides evidence on how the Fed uses the liquidity effect in conjunction with the announcement effect to execute monetary policy. In addition, it investigates the implications of the announcement effect on term structure behavior and the rational expectations hypothesis.

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Paper provided by California Davis - Department of Economics in its series Department of Economics with number 99-06.

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Handle: RePEc:fth:caldec:99-06
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  7. James D. Hamilton & Oscar Jorda, . "A model for the federal funds rate target," Department of Economics 99-07, California Davis - Department of Economics.
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  16. Eichengreen, Barry & Watson, Mark W & Grossman, Richard S, 1985. "Bank Rate Policy under the Interwar Gold Standard: A Dynamic Probit Model," Economic Journal, Royal Economic Society, vol. 95(379), pages 725-45, September.
  17. Hausman, Jerry A. & Lo, Andrew W. & MacKinlay, Archie Craig, 1955-, 1990. "An ordered probit analysis of transaction stock prices," Working papers 3234-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  18. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
  19. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February.
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