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Reserves Announcements and Interest Rates: Does Monetary Policy Matter?

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  • Hardouvelis, Gikas A

Abstract

The author provides evidence on the perceived existence of a strong liquidity effect. The analysis is based on the response of the term structure of interest rates to the weekly Federal Reserve announcements of bank reserves during the post-October 1979 time period. It is shown that unanticipated changes in the mix between borrowed and non-borrowed reserves cause expected real interest rates to change after the announcement because they provide information about a future change in the supply of money. A precise model is developed and tested during subperiods of non-borrowed and borrowed reserve targeting by the Fed. Copyright 1987 by American Finance Association.

Suggested Citation

  • Hardouvelis, Gikas A, 1987. "Reserves Announcements and Interest Rates: Does Monetary Policy Matter?," Journal of Finance, American Finance Association, vol. 42(2), pages 407-422, June.
    • Handle: RePEc:bla:jfinan:v:42:y:1987:i:2:p:407-22
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    Cited by:

    1. Bartunek, Kenneth S. & Madura, Jeff, 1996. "Wealth effects of reserve requirement reductions in the 1990s on depository institutions," Review of Financial Economics, Elsevier, vol. 5(2), pages 191-204.
    2. Vithessonthi, Chaiporn & Schwaninger, Markus & Müller, Matthias O., 2017. "Monetary policy, bank lending and corporate investment," International Review of Financial Analysis, Elsevier, vol. 50(C), pages 129-142.
    3. Vithessonthi, Chaiporn, 2014. "Monetary policy and the first- and second-moment exchange rate change during the global financial crisis: Evidence from Thailand," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 170-194.
    4. Vithessonthi, Chaiporn & Schwaninger, Markus & Müller, Matthias O., 2017. "Monetary policy, bank lending and corporate investment," International Review of Financial Analysis, Elsevier, vol. 50(C), pages 129-142.
    5. Markus Brückner & Evi Pappa, 2015. "News Shocks in the Data: Olympic Games and Their Macroeconomic Effects," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(7), pages 1339-1367, October.
    6. Kenneth S. Bartunek & Jeff Madura, 1996. "Wealth effects of reserve requirement reductions in the 1990s on depository institutions," Review of Financial Economics, John Wiley & Sons, vol. 5(2), pages 191-204.
    7. Arusha Cooray, 2003. "A test of the expectations hypothesis of the term structure of interest rates for Sri Lanka," Applied Economics, Taylor & Francis Journals, vol. 35(17), pages 1819-1827.
    8. Dow, James Jr., 2001. "The Recent Behavior of Adjustment Credit at the Discount Window," Journal of Macroeconomics, Elsevier, vol. 23(2), pages 199-211, April.
    9. Tarhan, Vefa, 1995. "Does the federal reserve affect asset prices?," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 1199-1222.
    10. O. David Gulley & Jahangir Sultan, 2003. "The link between monetary policy and stock and bond markets: evidence from the federal funds futures contract," Applied Financial Economics, Taylor & Francis Journals, vol. 13(3), pages 199-209.
    11. Sumner, Scott & Gulley, O. David & Newman, Ross, 1998. "Money Demand and Nominal Debt: An Equilibrium Model of the Liquidity Effect," Journal of Macroeconomics, Elsevier, vol. 20(2), pages 267-293, April.
    12. Mark J. Flannery & Aris A. Protopapadakis, 2002. "Macroeconomic Factors Do Influence Aggregate Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 751-782.
    13. Karfakis, Costas & Kim, Suk-Joong, 1995. "Exchange rates, interest rates and current account news: some evidence from Australia," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 575-595, August.
    14. Pappa, Evi & Brückner, Markus, 2011. "For an Olive Wreath? Olympic Games and Anticipation Effects in Macroeconomics," CEPR Discussion Papers 8516, C.E.P.R. Discussion Papers.

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