The Information Content of German Discount Rate Changes
Discount rate changes always receive considerable attention in financial markets. Two hypotheses compete to explain financial market reactions: the direct ‘borrowing cost effect’ and the announcement effect. This paper examines the issue for the Bundesbank’s discount rate changes after 1979. Summing up we find that market reactions cannot be attributed to a direct borrowing cost effect but exclusively to announcement effects. The empirical results indicate that interest rates react to changes in the discount rate to the extent that they are unanticipated. In contrast, the response to anticipated changes in the discount rate is small and insignificant. We proxy market anticipations by a multinomial logit-model combined with a dummy variable capturing non-quantifiable factors reported by the financial press. Moreover, we show that the response of interest rates declines along the term structure and with the switch to greater emphasis on repurchase operations in early 1985.
|Date of creation:||13 Jun 1997|
|Date of revision:|
|Note:||Type of Document - PDF; prepared on IBM PC; pages: 21 ; figures: included|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
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.:
- 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.
- Murphy, Kevin M & Topel, Robert H, 2002.
"Estimation and Inference in Two-Step Econometric Models,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 20(1), pages 88-97, January.
- Murphy, Kevin M & Topel, Robert H, 1985. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(4), pages 370-79, October.
- 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, 1996. "The information content of discount rate announcements: what's behind the announcement effect?," Working Papers 1994-032, Federal Reserve Bank of St. Louis.
- 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.
- 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.
- Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory 95-02, Federal Reserve Bank of San Francisco.
- Daniel L. Thornton, 1982. "The discount rate and market interest rates: what's the connection?," Review, Federal Reserve Bank of St. Louis, issue Jun, pages 3-14.
- repec:tpr:qjecon:v:91:y:1977:i:1:p:171-76 is not listed on IDEAS
- 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.
- 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.
- Craig S. Hakkio & Douglas K. Pearce, 1986. "Exchange rates and discount rate changes," Research Working Paper 86-06, Federal Reserve Bank of Kansas City.
- Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:9706006. 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: (EconWPA)
If references are entirely missing, you can add them using this form.