Why Money Announcements Move Interest Rates: An Answer from the Foreign Exchange Market / Charles Engel, Jeffrey A. Frankel.

Format:

Book

Author/Creator:

Engel, Charles.

Contributor:

National Bureau of Economic Research.

Frankel, Jeffrey A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1049.

NBER working paper series no. w1049

Language:

English

Subjects (All):

Property tax.

Wealth tax.

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Why Money Announcements Move Interest Rates

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1982.

Cambridge, Massachusetts : National Bureau of Economic Research, 1982.

Summary:

On a Friday that the Fed announces a money supply greater than had been anticipated, interest rates move up in response. Why? One explanation is that the market perceives the fluctuation in the moneystock as an unintended deviation from the Fed's target growth rate that will be reversed in subsequent periods. The anticipation of this future tightening drives up interest rates today. A second explanation is that the market perceives the increase in the money supply as signalling a higher target growth rate. The expected future inflation rate rises,which is reflected in a higher nominal Interest rate.This paper offers grounds for choosing between the two possible explanations: evidence from the exchange market. Under the first explanation, anticipated future tightening, one would expect the dollar to appreciate against foreign currencies. Under the second explanation,expected inflation, one would expect it to depreciate. We render these claims more concrete by a formal model, a generalization of the Dornbusch overshooting model. Then we use the mark/dollar rate toanswer the question. We find a statistically significant tendency for the dollar to appreciate following positive money supply surprises.This supports the first explanation.

Notes:

Print version record

December 1982.