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Federal Reserve Policy, Interest Rate Volatility, and the U.S. Capital Raising Mechanism

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  • Benjamin M. Friedman

Abstract

The evidence presented in this paper leads to three conclusions about possible effects on the U.S. long-term capital. raising mechanism due to the sharp increase in interest rate volatility that has followed the Federal Reserve System's adoption of new monetary policy procedures in 1979. First, the increased volatility has probably led nonfinancial corporations to finance less of their external funds requirements at long term than they would other- wise have done. Second, the increased volatility has probably led underwriters of high grade corporate bonds to increase the spread of a typical new issue's yield over the prevailing market yield on comparable bonds already outstanding. Third, there is little firm basis (reported here, anyway) to conclude that the increased volatility in particular has affected investors' portfolio behavior in the bond market.

Suggested Citation

  • Benjamin M. Friedman, 1982. "Federal Reserve Policy, Interest Rate Volatility, and the U.S. Capital Raising Mechanism," NBER Working Papers 0917, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0917
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    References listed on IDEAS

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    1. Benjamin M. Friedman, 1980. "The Effect of Shifting Wealth Ownership on the Term Structure of Interest Rates," NBER Working Papers 0239, National Bureau of Economic Research, Inc.
    2. Ederington, Louis H, 1974. "The Yield Spread of New Issues of Corporate Bonds," Journal of Finance, American Finance Association, vol. 29(5), pages 1531-1543, December.
    3. Friedman, Benjamin M, 1979. "Substitution and Expectation Effects on Long-Term Borrowing Behavior and Long-Term Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(2), pages 131-150, May.
    4. Lombra, Raymond & Struble, Frederick, 1979. "Monetary Aggregate Targets and the Volatility of Interest Rates: A Taxonomic Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 284-300, August.
    5. Friedman, Benjamin M, 1977. "Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 661-689, August.
    6. Benjamin M. Friedman & V. Vance Roley, 1979. "A Note on the Derivation of Linear Homogeneous Asset Demand Functions," NBER Working Papers 0345, National Bureau of Economic Research, Inc.
    7. Friedman, Benjamin Morton, 1977. "Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates," Scholarly Articles 4554309, Harvard University Department of Economics.
    8. Bodie, Zvi & Friedman, Benjamin M, 1978. "Interest Rate Uncertainty and the Value of Bond Call Protection," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 19-43, February.
    9. Lintner, John, 1969. "The Aggregation of Investor's Diverse Judgments and Preferences in Purely Competitive Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 4(4), pages 347-400, December.
    10. Benjamin M. Friedman, 1978. "Who Puts the Inflation Premium Into Nominal Interests Rates?," NBER Working Papers 0231, National Bureau of Economic Research, Inc.
    11. Bischoff, Charles W, 1970. "A Model of Nonresidential Construction in the United States," American Economic Review, American Economic Association, vol. 60(2), pages 10-17, May.
    12. Friedman, Benjamin M, 1978. "Who Puts the Inflation Premium into Nominal Interest Rates?," Journal of Finance, American Finance Association, vol. 33(3), pages 833-845, June.
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    Cited by:

    1. Falls, Gregory A. & Natke, Paul A., 1996. "Cash flow instability and the demand for liquid assets by firms in Brazilian Manufacturing," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(2), pages 233-248.
    2. Goodhart, Charles, 1989. "The Conduct of Monetary Policy," Economic Journal, Royal Economic Society, vol. 99(396), pages 293-346, June.
    3. Hasan, Syed Akif & Subhani, Muhammad Imtiaz & Osman, Ms. Amber, 2012. "Fiscal Deficit cannot be reduced by increasing Taxes (A point to ponder from Pakistan)," MPRA Paper 35681, University Library of Munich, Germany.
    4. Pami Dua, 1993. "Interest Rates, Government Purchases, and Budget Deficits: a Forward-Looking Model," Public Finance Review, , vol. 21(4), pages 470-478, October.
    5. Kenneth Kalu, 2017. "A Re-Examination of the Asymmetry between Interest Rates and Stock Returns," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(6), pages 23-30, June.
    6. Robert J. Gordon, 1983. "The Conduct of Domestic Monetary Policy," NBER Working Papers 1221, National Bureau of Economic Research, Inc.
    7. Godwin Olasehinde-Williams & Oktay Özkan, 2022. "Is interest rate uncertainty a predictor of investment volatility? evidence from the wild bootstrap likelihood ratio approach," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(3), pages 507-521, July.
    8. Mcgibany, James M. & Nourzad, Farrokh, 1995. "Exchange rate volatility and the demand for money in the U.S," International Review of Economics & Finance, Elsevier, vol. 4(4), pages 411-425.
    9. Elder, John, 2001. "Can the Volatility of the Federal Funds Rate Explain the Time-Varying Risk Premium in Treasury Bill Returns?," Journal of Macroeconomics, Elsevier, vol. 23(1), pages 73-97, January.

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