the information value of the fomc policy directive under the new operating procedures the federal reserve s federal open market committee fomc meets every one to two months to determine its monetary policy objectives over the near term at the conclusion of each meeting the fomc issues a policy directive to the system s account manager at the new york federal reserve bank specifying short run money growth targets and a federal funds interest rate tolerance range the policy directive is not disclosed to the public until after the next meeting when a new directive becomes effective in an earlier paper o brien 1981 evidence was presented suggesting that immediate disclosure of the fomc policy directives over the period january 1976 june 1979 would have improved the accuracy of market expectations of near term interest rate levels by no more than minor amounts in this paper we examine the information value of the fomc policy directives in predicting near term levels of interest rates urder the federal reserve s revised operating procedures adopted in late october 1979 but modified in late 1982 in the next section the interest rate information value of the fomc policy directive is discussed in terms of a simple money demand and supply model

money supply announcements and real interest rates abstract current research on the relation between money and asset prices focuses on the reaction of asset prices to money supply announcements in this paper we use the real interest observed in the u k index linked bond market and the nominal interest rate observed in the nominal bond market to study the reaction of real interest rates and expected inflation to money surprises we find that monetary surprises have a strong effect on inflationary expectations we also find some evidence of a positive reaction of long term real interest rates to the m3 announcement

day of the week effects and asset returns the number of empirical studies using daily stock returns is rapidly increasing researchers generally assume that the distribution of stock returns is identical for all days of the week a convenient statistical assumption but not a necessary condition of market equilibrium nevertheless there are reasons to suspect that the distribution of returns may vary according to the day of the week the most obvious is the impact of weekends on monday s return since monday s return is calculated over three instead of one calender day the mean and variance may well be higher on monday compared with any other daily return perhaps three times as large previous research has examined the daily distribution of stock returns for a monday effect while fama 1965 does not compare daily mean returns he does report that monday s variance is about 20o greater than other daily returns with a traditional distributional assumption regarding the returns on a financial asset specifies that the expected returns are identical for all days of the week contrary to this plausible assumption this paper discovers that the expected returns on common stocks and treasury bills are not constant across days of the week the most notable evidence is for monday s returns where the mean is unusually low or even negative several explanations of the results are investigated but none proves satisfactory aside from documenting significant day of the week effects the implications of the results for tests of market efficiency are examined while market adjusted returns continue to exhibit day of the week effects these effects are no longer concentrated on monday during the last year we have had many conversations with our colleagues throughout the professions we are particularly thankful to the participants at sessions of the western and american finance associations where preliminary versions of this paper were presented special thanks are due to gene fama gailen hite jon ingersoll robert jarrow merton miller clifford smith and rex thompson the expert research assistance of frank rabinovitch and youngsup yun is gratefully acknowledged 1 the list of papers using daily stock returns is too long to name recent examples include charest 1978 dodd 1980 banz 1981 and reinganum 1981

monetary policy regimes expected inflation and the response of interest rates to money announcements this paper examines the response of the term structure of interest rates to weekly money announcements estimated responses for both the pre and post october 1979 periods are first presented then two competing hypotheses involving the policy anticipations and expected inflation effects are formally specified and compared with the estimated responses both hypotheses are found to be consistent with the responses but they have sharply different implications about the federal reserve s short run monetary policy by exploiting these different implications additional empirical results focusing directly on the money stock process support the policy anticipations hypothesis

money supply announcements and interest rates another view in this paper i use a new approach to analyze the impact of money supply announcements on the bond market before 1980 the only available work on this subject consisted of a few unpublished papers by conrad 1978 sivesind 1978 and urich 1979 1 more recently published papers by grossman 1981 and urich and wachtel 1981 have appeared roley 1982 extends the grossman study to incorporate data after the federal reserve policy statement of october 6 1979 both grossman and urich and wachtel are primarily concerned with the question of money market efficiency using survey data made available by money market services of san francisco and data on treasury bill yields each finds that the market responds quickly to unanticipated changes in the money supply but that anticipated changes have no effect on interest rates in addition grossman finds that when he adds other variables such as past changes in the money

us money announcements and covered interest parity the case of japan abstract this paper examines the effects of us money announcements on dollar and yen denominated securities in their respective onshore markets the effects are consdered over several periods corresponding to possible us and japanese policy regimes the consistency of the responses is further examined by testing whether the responses of dollar denominated securities yen denominated securities the spot yen dollar exchange rate and the forward yen dollar exchange rate violate covered interest parity given the results of previous studies the evidence suggests that restrictions on capital mobility in japan have not allowed complete international integration of japanese financial markets

comparing time series and survey forecasts of weekly changes in money a methodological note measured as the difference between the announced change and the expected change derived from the money market services inc weekly survey of government securities dealers unlike other survey measures of expectations the most notable example of which is the livingston survey data these expectations are formed by active market participants consequently the survey s forecast made public before the fed s announcement of the actual change in the money stock is commonly thought to represent the market s expectation the concern in this paper is not with the impact of unanticipated money changes on nominal interest rates the purpose is to compare the relative forecasting abilities of the survey predictions and those obtained from a timeseries model this question is of interest because the weekly money series used in previous research includes certain abnormal weeks in which exogenous factors may significantly alter the series stochastic properties see for example cornell 1 urich and wachtel 9 thus the influence of these abnormal weeks weeks that include benchmark revisions changes in seasonal factors and weeks in which there is a social security effect is examined by comparing forecasting results for two samples one includes these weeks and the other deletes them following pearce 6 this approach allows us to test the hypothesis that the survey responses are at least weak form rational and to see how sensitive this test is to the sample of weeks used unlike previous studies we use two survey forecast series the median forecast made public prior to the announced change in ml and the mean series constructed from individual respondents forecasts zarnowitz s 10 examination of the asa nber survey forecasts indicates that the mean forecast is on average statistically superior to the median this finding is based on the idea that the mean forecast uses a more informationally diverse data set consequently it is

monetary policy and long term interest rates an efficient markets approach abstract this paper is an application of efficient markets theory to analyze empirically the relationship of money supply growth and long term interest rates this approach has the advantage over calier research on this subject in that it imposes a theoretical structure on this relationship that flows easier interpretation of the empirical results as well as more powerful statistical tests on the interest of ascertaining the robustness of the results many different empirical tests are carried out in this paper and they uniformly do not support the preposition that increases in the money supply are correlated with declines in long rates

the effects of inflation and money supply announcements on interest rates 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 a 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 the effect of money supply announcements on interest rates has attracted considerable attention in both the academic literature and the financial press in the last few years it has been firmly established that unanticipated increases in the money supply lead to immediate increases in interest rates however there are several competing explanations for this phenomenon in the literature in this paper we present some additional empirical evidence which helps to distinguish between two of these hypotheses the policy anticipations and inflationary expectations hypotheses by examining the effect of money supply and inflation announcements on interest rates the positive effect on interest rates of announcements of unanticipated increases in the money supply was demonstrated by urich and wachtel 9 grossman 3 and roley 5 the announcement effect was interpreted in our earlier paper as a policy anticipations effect and has been interpreted by others e g cornell 1 as an inflationary expectations effect since both effects are in the same direction it is difficult to distinguish between them without additional evidence the policy anticipations effect is simply that an unanticipated increase in the money supply causes financial market participants to expect that the federal reserve will tighten the monetary reins in order to offset the increase in anticipation of future tightening there is a tendency for interest rates to increase the inflationary expectations effect is that an unanticipated increase

canadian weekly money supply announcements and financial market reactions in the first years of targeting a view of market perceptions of bank of canada policy this paper demonstrates using weekly data between 1976 and 1979 that unanticipated changes in the canadian money supply exerted a significant impact on the foreign exchange and bond markets during the first years of the bank of canada s policy of targeting m1 growth this finding which is perhaps surprising in light of the apparent volatility of weekly changes in the canadian money supply is consistent with the efficient markets paradigm after the empirical regularities are established an interpretation is offered that focuses on market perceptions of the reaction function of the bank of canada

money supply announcements interest rates and foreign exchange abstract this paper presents a test of the joint hypothesis that money supply announcements affect the real interest rate and that changes in the real interest rate affect the exchange rate in the short run the test results are consistent with the joint hypothesis for example it is found that announcement of an unexpected jump in the money supply is accompanied by an increase in interest rates and an appreciation of the dollar if the rise in interest rates was entirely due to higher inflationary expectations the dollar should not appreciate

stock prices and the effective exchange rate of the dollar the literature on the relation between stock prices and exchange rates is very poor and includes few studies that have argued that exchange rate changes do effect stock prices by relying on the portfolio approach to exchange rate determination it is argued that a change in stock prices could also have an impact on exchange rates i e there could be a two way relationship between exchange rates and stock prices granger concept of causality as well as cointegration technique are employed to support this conjecture the empirical results show that there is bidirectional causality between stock prices measured by s p 500 index and the effective exchange rate of the dollar at least in the short run the cointegration analysis reveals that there is no long run relationship between two variables

inflation output and money this paper uses money demand theory and a rational expectations version of the quantity theory of money to study inflation in the united states during the post korean war period the major results are as follows 1 the theory and tests explain the phenomenon of stagflation that is the negative relation between inflation and real activity observed during the post 1953 period the analysis calls into question the many variants of the phillips curve which presume that inflation real activity relations are positive 2 consistent with the models of patinkin 1961 and fama 1980 monthly quarterly and annual data indicate that the base currency plus reserves held against deposits is the relevant monetary variable in the inflation process and that demand deposits are irrelevant the direct policy implication is that the base is the key monetary variable in the control of inflation 3 the most convincing evidence for the simple quantity theory view of inflation proposed here comes from the comparison of the conditional exmoney demand theory and the quantity theory of money are used to study the inflation process as predicted by the model monthly quarterly and annual data indicate that inflation is positively related to money growth rates and negatively related to growth rates of real activity the theoretical and empirical origins of stagflation are explained and changes in monetary arrangements to simplify the control of inflation are prescribed

syndicated euro credit sovereign risk assessments market efficiency and contagion effects this study investigates the informational efficiency of the syndicated euro credit market by analyzing the adjustment of spreads to news characterizing the state of sovereign borrowers creditworthiness in addition the potential for an interlinked crisis contagion effects between three major borrowing countries is examined that is contagion tests are conducted to see how news for one borrower affects the spreads charged to the others the evidence suggests that the euro credit pricing process has been informationally efficient however with respect to the contagion effects it was found that noncountry specific risk factors systematically influence country specific spreads

inflation real returns and capital investment we find evidence for the hypothesis of mundell 1963 and tobin 1965 that the expected real return component of interest rates is negatively related to the expected inflation component in the mundell tobin model the variation in expected real returns is caused by the variation in expected inflation our evidence suggests however that the variation in expected real returns is more fundamentally an outcome of the capital expenditures process equilibrium expected real returns vary directly with capital expenditures in order to induce equilibrium allocations of resources between consumption and investment this positive relation between expected real returns and real activity which comes out of the real sector combines with a negative relation between expected inflation and real activity which is traced to the monetary sector thus inducing the negative relation between expected inflation and expected real returns predicted by mundell and tobin but explained in terms of a model much different from theirs

monetary policy and short term interest rates an efficient markets rational expectations approach this paper is an application of efficient markets rational expectations theory to analyze empirically the relationship of money supply growth and short term interest rates a hotly debated issue in the literature this approach has the advantage over earlier research on this subject in that it imposes a theoretical structure that allows easier interpretation of the empirical results as well as more powerful statistical tests the empirical results uniformly do not support the proposition that increases in money growth are correlated with declines in short rates the relationship between money supply growth and nominal interest rates is a hotly debated issue in the literature one view associated with keynesian structural macromodels has an increase in money growth leading at least in the short and medium runs to a decline in interest rates 2 an alternative view associated with milton friedman 6 7 indicates that interest rates might rise in response to higher money growth because there is a rise in inflationary expectations and hence a rise in interest rates through a fisher 5 effect

the policy anticipation hypothesis and the expected inflation hypothesis some new evidence using index linked bonds abstract using price index linked and conventional bonds issued by the uk government estimates of expected inflation and the expected real interest rate are derived these estimates are employed to investigate the relationship between components of the nominal interest rate and surprise monetary change the empirical results support the expected inflation hypothesis rather than the policy anticipation hypothesis

external costs of energy do the answers match the questions looking back at 10 years of externe abstract while the claim for getting prices right is quite popular in conceptual policy papers the implementation of appropriate internalisation strategies is still hampered by a lack of reliable external cost data great expectations were set into the externe project a major research programme launched by the european commission at the beginning of the 1990s to provide a scientific basis for the quantification of energy related externalities and to give guidance supporting the design of internalisation measures after more than a decade of research the externe label became a well recognised standard source for external cost data looking back into the externe history the paper pursues how emerging new scientific insights and changing background assumptions affected external cost estimates and related recommendations to policy over time based on externe results the usefulness and inherent limitations of external cost estimates for impact categories like climate change or nuclear waste disposal is discussed the paper also gives examples on how external costs in spite of remaining uncertainties are successfully used to support environmental policy

the impact of monetary announcements on forward interest rates movements in term premia or expected future rates abstract evidence is presented on how the response of forward interest rates to money supply and monetary base announcements is decomposed into movements in term premia and expected future interest rates a significant movement of each component is found for at least one sample period

the effect of relative monetary surprises on spot exchange rates this paper examines the hypothetical relationship between us and canadian monetary surprises and the behaviour of us canadian spot exchange rates past studies have found that positive us monetary surprises were correlated with an appreciating us dollar in foreign exchange markets in this paper it is argued that monetary surprises in the us must be measured relative to foreign monetary innovation rather than in the conventional absolute sense when examining their impact on exchange markets rational investors consider expected returns and risk differentials in the us and local markets jointly in determining whether to be net buyers or sellers of us dollars the monetary actions of both the fed and the central bank operating in the local foreign economy will be considered in the foreign exchange market because of the close synchronization between the weekly money supply announcements in canada and the us it is possible to examine whether the relative or absolute us monetary surprise is more signifi

tariff equivalent of technical barriers to trade with imperfect substitution and trade costs the price wedge method yields a tariff equivalent estimate of technical barriers to trade tbt an extension of this method accounts for imperfect substitution between domestic and imported goods and incorporates recent findings on trade costs we explore the sensitivity of this revamped tbt estimate to its key determinants substitution elasticity preference for home good and trade cost we use the augmented approach to investigate the recent japan u s apple trade dispute and find that removing the japanese tbt would yield limited export gains to the united states we then draw policy implications of our findings

the information content of weekly money supply announcements this paper analyzes the information content of weekly money supply announcements and the use of this information in the market determination of interest rates a short term rational expectations model of the financial market is constructed which incorporates the reaction of the federal reserve to deviations from target money supply and provides a context for analyzing the impact of announcements in the model the federal reserve attempts to maintain target growth rates in the money supply by compensating for past deviations from target announcements which contain an unanticipated movement in the money supply lead the public to expect that the federal reserve will change the rate of growth in the short run to compensate the revision of expectations about future short term money supply leads the public to revise their expectations about short term interest rates the implications of the model are empirically tested using data from a survey of expected changes in the money supply and u s treasury bill data the results support the implications of the model that is weekly money supply announcements do contain new information for the market determination of interest rates and it is only the unanticipated component of the announcement which is important

short term interest rates as predictors of inflation on testing the hypothesis that the real rate of interest is constant in an innovative and provocative paper in this review eugene fama presents evidence which appears to be consistent with the joint hypothesis that the real rate of interest ignoring taxes is a constant and that the market for u s treasury bills is efficient in the sense of embodying rational expectations those findings are strikingly at variance with a long list of previous studies which seemed to support the view that the real rate of interest varies over time and can be related to economic variables such as real output monetary policy and so forth 2 the methodologies which lead to these contradictory conclusions are quite different previous studies had followed the lead of irving fisher by relating nominal interest rates to distributed lags on past rates of inflation 3 these distributed lags are generally interpreted as approximations to the market s expected rate of inflation and thus any remaining variation is attributed to variation in the real rate 4 fama s methodology on the other hand draws on the fact that the difference between the market interest rate and the subsequently observed rate of inflation the ex post real interest rate consists by definition of the ex ante real interest rate plus a pure forecasting error 5 the hypothesis of market efficiency implies that these forecasting errors must be serially random thus observing ex post real rates is equivalent to observing ex ante real rates with random measurement error these errors of course confound the problem of identifying variation in the ex ante real rate in this paper we will argue that the relative magnitude of these measurement errors is such that the tests carried out by fama were not powerful enough to reject the joint hypothesis that the ex ante real rate is a constant and expectations are rational more powerful tests which are presented in this paper using the same data do lead to rejection of that hypothesis of course rejection