The Response of Interest Rates to Money Announcements under Alternative Operating Prosedures and Reserve Requirement Systems

The response of interest rates to money announcement surprises is examined both theoretically and empirically in this paper. In the theoretical models developed, not only changes in operating procedures, but also reserve requirement systems, are found to potentially affect the response. Moreover, under the current two-week contemporaneous reserve requirements (CRR) adopted in February 1984, the responses in the first and second weeks of the two-week reserve maintenance period may differ. The empirical results generally conform to the predictions of the theoretical models. The response of the Treasury bill yield to money announcement surprises changed significantly following changes in either operating procedures or reserve requirement systems in October 1979, October 1982, and February 1984.

Asset Substitutability and the Impact of Federal Deficits

In this paper, the role of asset substitutability in determining the impact of debt-financed federal deficits is examined. The issues are first discussed in the context of a simple analytical model in which financial assets are disaggregated into money, federal debt,and corporate bonds. In this model, it is shown that depending on the degree of substitutability among financial assets, a range of possible outcomes associated with a change in the federal deficit is possible.Next, the issue of asset substitutability is examine dempirically in a disaggregated structural model of the Treasury security,corporate bond, and equity markets. Using this model, the implications of larger debt-financed federal deficits are then examined in a series of simulation experiments.

Intraday Yen/Dollar Exchange Rate Movements: News or Noise?

Intraday movements in the yen/dollar rate are examined over the 1980-86 period using opening and closing quotes in the New York and Tokyo markets. The results indicate that random-walk behavior is violated about half of the time in various subsamples. However, the economic significance of departures from the random-walk model diminishes over time. Large jumps in the exchange rate also are examined, and some evidence on subsequent mean reversion is presented. Finally, the response of Japanese and U.S. stock prices suggests that intraday yen/dollar rate movements do contain at least some relevant information.

Unanticipated Money and Interest Rates

Evidence on the relationship between unanticipated money and interestrates has been provided by two types of studies. First, several researchers have investigated the relationship using quarterly data. Second, a number of researchers have examined the effect of money announcement surprises on interest rates. In both instances, the correlation between money surprises and interest rates has usually been found to be non-negative.This paper first provides an interpretation of the correlation between unanticipated money and interest rates in terms of Federal Reserve policy objectives and operating procedures. Then, the correlation of unanticipated money and both short- and long-term interest rates is examined over weekly intervals, combining several aspects of the previous quarterly and announcement studies. In addition, the distinction between unpredicted and unperceived money also is considered.

The Reaction of Stock Prices to Unanticipated Changes in Money

This paper investigates the short-run effect of unexpected changes in the weekly money stock on common stock prices. Survey data on money market participants' forecasts of money changes are employed to construct the measure of unanticipated movements in the money stock. The results indicate that an unexpected increase in money depresses stock prices and, consistent with the efficient markets hypothesis, only the unexpected part of the weekly money announcement causes stock price fluctuations. The October 1979 change in Federal Reserve operating procedures appears to have made stock prices somewhat more sensitive to large money surprises.

Firm Characteristics, Unanticipated Inflation, and Stock Returns

This paper re-examines the effects of nominal contracts on the relationship between unanticipated inflation and individual stock's rate of return. This study differs in three main ways from previous research. First, announced inflation data are used to examine the effects of unanticipated inflation. Second, a different specification is used to obtain more efficient estimates. Third, additional nominal contracts are considered. The empirical results indicate that time-varying firm characteristics related to inflation predominately determine the effect of unanticipated inflation on a stock's rate of return. A firm's debt-equity ratio appears to be particularly important in determining the response.