The Effects of Inflation and Money Supply Announcements on Interest Rates

Article, Preprint OPEN
Thomas Urich ; Paul Wachtel (1984)
  • Journal: Journal of Finance, volume 39, issue 4 September, pages 1,177-88
  • Subject:
    mesheuropmc: health care economics and organizations
    acm: ComputingMilieux_MISCELLANEOUS

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 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.
  • References (7)

    1/ lJrich (1982) provides a theoretical model of the policy anticipations effect and Cornell (l983b) provides a taxonomy of hypotheses concerning the mane'; supply announcement. He includes the two considered here - the policy anticipations and inflationary expectations effects - and adds real activity and risk-aversion hypotheses.

    2/ Schwert (1981) investigated the effect of the OPI announcement on stock prices and found some evidence that unanticipated inflation depresses stock returns. Foley (1983) did not find any significant effects of unanticipated inflation announcements on Treasury bill yields.

    3/ Walsh (1982) provides a model of the effect of the money supply announcement on the demand for reserves and intra-week variation in interest rates.

    4/ There have been changes in the announcement procedures and data definitions since the end of our sample period. In particular, the narrowly defined money supply has been revised slightly and renamed Ml, and the announcement day returned to Thursday when the lag in reserve accounting was reduced. The examination of announcement effects was restricted to Ml because of the availability of expectations data (see below). Survey data on expectations of reserves, the monetary base or broader definitions of the money supply are not available.

    6/ To place these responses in perspective note that the standard deviatcn in the unanticipated money supply change for the whole sample is abcst 82 billion. (Uric)', and Wachtel 2981), and elsewhere.

    2/ Tne results are the same when the money supply and price announcerent are tested separately. Also the coefficients on the immedcate announcement effect (the oj,'s) which are not shown in Table 3 are virtually the same as the corresponding results in Table 2.

    8/ Schwert (1981) found that the stock market reacts to the CPI arround the time of the announcement and not when the price change occurs. Huberman and Schwert (1981) find that the prices of Israeli indexed bonds respond to inflation as it occurs and prior to the announcement. We did not find any evidence of CPI effects on interest rates when the price change occurs.

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