Working Paper: NBER ID: w1313
Authors: Thomas Urich; Paul Wachtel
Abstract: This paper examines the impact of the money supply and inflation rate announcements on interest rates. Survey data on expectations of the money supply and consumer and producer price indexes are used to distinguish anticipated and unanticipated components of the announcements. This distinction is used to test for the efficiency of the financial market response to the announcements of new information. The results indicate that the unanticipated components of the announced changes in the Producers Price Index and in the money supply have an immediate positive effect on short term interest rates.The Consumer Price Index announcement has no apparent effect. There is no evidence of a delayed announcement effect. However, there is some indication of liquidity effect of the money supply change on interest rates. This takes place when reserves are changing and several weeks prior to the information announcement.
Keywords: money supply; inflation; interest rates; financial markets
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unanticipated components of the money supply announcement (E49) | short-term interest rates (E43) |
| unanticipated component of the PPI (E31) | short-term interest rates (E43) |
| money supply changes (E51) | interest rates (E43) |
| CPI announcements (E31) | short-term interest rates (E43) |