Monetary Policy in a Changing World: Rising Role of Expectations and the Anticipation Effect

50 Pages Posted: 17 Dec 2001

See all articles by Selva Demiralp

Selva Demiralp

Koc University - Department of Economics

Date Written: December 2001

Abstract

The Federal Reserve (Fed) has maintained a general trend toward increased transparency and gradualism. This paper investigates the implications of these historical developments for the anticipation of monetary policy actions and adjustment of interest rates. In a theoretical framework, we establish the Fed's ability to manipulate overnight rates via an "anticipation" effect. The anticipation effect is defined as interest rate adjustments that take place prior to a policy announcement (or prior to when the complementary open market operations associated with that policy action take place) due to market's improved ability to predict future policy actions. Our empirical results document that most market rates adjust to anticipated policy actions prior to the actual announcement. Because the market responds to policy announcements instantly, the Trading Desk does not need to act immediately after the target change and can wait until the market incorporates the new information that comes with the policy announcement.

Keywords: Transparency, liquidity effect, announcement effect, anticipation effect

JEL Classification: E0, E4, E5

Suggested Citation

Demiralp, Selva, Monetary Policy in a Changing World: Rising Role of Expectations and the Anticipation Effect (December 2001). Available at SSRN: https://ssrn.com/abstract=293949 or http://dx.doi.org/10.2139/ssrn.293949

Selva Demiralp (Contact Author)

Koc University - Department of Economics ( email )

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

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