Working Paper: NBER ID: w1858
Authors: V. Vance Roley
Abstract: This paper examines the pervasiveness of the effects of U.S. monetary policy regime shifts and unanticipated changes in money on international financial markets. Four potential regimes from October 1977 to May 1985 are examined in terms of the response of yen-denominated securities in the Tokyo market to U.S. money surprises. The rationality of the responses in domestic and foreign on shore financial markets is further examined by testing whether the responses of dollar-denominated securities, yen-dominated securities, the spot yen/dollar exchange rate,and the forward yen/dollar exchange rate violate covered interest parity.The use of yen-denominated assets and the yen/dollar exchange rate allows further tests of the effects of the liberalization of restrictions on capital mobility in Japan since the late 1970s on market efficiency.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US monetary policy regime shifts (E63) | volatility of US interest rates (E43) |
| US monetary policy regime shifts (E63) | responsiveness of US interest rates to money announcement surprises (E49) |
| shift to borrowed reserves procedure (F32) | responsiveness of interest rates to money surprises (E47) |
| positive 1 percent money surprise (E49) | appreciation of the dollar against the yen (F31) |
| US monetary policy regime shifts (E63) | responses of yen-dollar exchange rate to US money surprises (F31) |
| deviations from covered interest parity (F31) | potential inefficiencies in the market (D61) |
| responses of yen-dollar forward premium and gensaki rate to money announcement surprises cannot be uniformly predicted (F31) | complex interaction between US monetary policy and international financial market dynamics (F30) |