The Pavlovian Response of Term Rates to Fed Announcements

UC Davis Working Paper No. 99-06R

47 Pages Posted: 12 Dec 2000

See all articles by Oscar Jorda

Oscar Jorda

University of California, Davis - Department of Economics; Federal Reserve Banks - Federal Reserve Bank of San Francisco

Selva Demiralp

Koc University - Department of Economics

Date Written: November 2000

Abstract

The traditional view of the monetary transmission mechanism rests on the premise that the Federal Reserve (Fed) controls the level of the Federal funds rate via open market operations and the liquidity effect. By contrast, this paper argues that the Fed also manipulates the Federal funds rate via public disclosures of the new level of the Federal funds rate target and the "announcement effect." We define the announcement effect as the portion of interest rate movements associated with public statements on interest rate targets that do not require conventional open market operations for their support. This paper provides evidence on how the Fed uses the liquidity effect in conjunction with the announcement effect to execute monetary policy. In addition, it investigates the implications of the announcement effect on term structure behavior and the rational expectations hypothesis.

Keywords: liquidity effect, announcement effect, term structure, marked point process

JEL Classification: E5, E4, C5

Suggested Citation

Jorda, Oscar and Demiralp, Selva, The Pavlovian Response of Term Rates to Fed Announcements (November 2000). UC Davis Working Paper No. 99-06R, Available at SSRN: https://ssrn.com/abstract=250794 or http://dx.doi.org/10.2139/ssrn.250794

Oscar Jorda (Contact Author)

University of California, Davis - Department of Economics ( email )

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530-5549382 (Phone)

HOME PAGE: http://old.econ.ucdavis.edu/faculty/jorda/

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

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San Francisco, CA 94105
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HOME PAGE: http://www.frbsf.org/economic-research/economists/oscar-jorda/

Selva Demiralp

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 80910 Istanbul
Turkey
+212 338 1842 (Phone)

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