Working Paper: NBER ID: w1806
Authors: John Y. Campbell
Abstract: The effect of money stock announcements on the Federal funds rate has been attributed informally to the information conveyed by the announcements about aggregate reserve demand. This "Aggregate Information Hypothesis" explains the effect without reference to Federal Reserve intervention in the funds market. In this paper I provide a formal model of the Aggregate Information Hypothesis under lagged reserve accounting.The model relies on imperfect information in the funds market, and on imperfect bank arbitrage of reserve demand between days of the week. Some stylized facts are presented about funds rate behavior in the period 1980-1983.
Keywords: Federal funds rate; Money announcements; Bank reserves; Lagged reserve accounting
JEL Codes: E5; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| day-to-day changes in the federal funds rate within the statement week (E52) | banks' reserve holdings do not adjust as expected (E58) |
| positive money surprise (G14) | increase in the federal funds rate (E52) |
| money stock announcements (E51) | banks' expectations about reserve demand (E47) |
| banks' expectations about reserve demand (E47) | changes in the federal funds rate for the remainder of the week (E52) |