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Monetary policy in a changing world: rising role of expectations and the anticipation effect

Selva Demiralp

No 2001-55, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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: Monetary policy; Interest rates; Federal funds rate (search for similar items in EconPapers)
Date: 2001
New Economics Papers: this item is included in nep-cba, nep-mon and nep-pke
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