Working Paper: NBER ID: w1181
Authors: V. Vance Roley; Carl E. Walsh
Abstract: This paper examines the response of the term structure of interest rates to weekly money announcements. Estimated responses for both the pre- and post-October 1979 periods are first presented. Then, two competing hypotheses involving the policy anticipations and expected inflation effects are formally specified and compared to the estimated responses.Both hypotheses are found to be consistent with the responses, but they have sharply different implications about the Federal Reserve's short-run monetary policy. The expected inflation hypothesis implies that weekly money surprises should have persistent effects on the level of the money stock, reflecting shifts in the Federal Reserve's long-run target. In contrast, the policy anticipations hypothesis implies that the effectof money surprises should diminish over time, reflecting the Federal Reserve's desire to offset deviations from target. Additional empirical results reported in the paper support this latter description of the money stock process.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive surprise in a weekly money announcement (E60) | Increase in expected inflation (E31) |
| Federal Reserve's reduced commitment to monetary control (E52) | Increased response of interest rates following policy change in October 1979 (E43) |
| Market participants anticipate future Federal Reserve actions (E52) | Real interest rates change in response to unanticipated money changes (E49) |
| Unanticipated money changes (F31) | Greater desire by the Federal Reserve to control money supply post-October 1979 (E52) |
| Empirical results support policy anticipations hypothesis (D78) | Significant responses of long-term interest rates in both periods (E43) |