The information content of weekly money supply announcements

Abstract

This paper analyzes the information content of weekly money supply announcements and the use of this information in the market determination of interest rates. A short-term rational expectations model of the financial market is constructed which incorporates the reaction of the Federal Reserve to deviations from target money supply and provides a context for analyzing the impact of announcements. In the model, the Federal Reserve attempts to maintain target growth rates in the money supply by compensating for past deviations from target. Announcements which contain an unanticipated movement in the money supply lead the public to expect that the Federal Reserve will change the rate of growth in the short-run to compensate. The revision of expectations about future short-term money supply leads the public to revise their expectations about short-term interest rates. The implications of the model are empirically tested using data from a survey of expected changes in the money supply and U.S. Treasury bill data. The results support the implications of the model. That is, weekly money supply announcements do contain new information for the market determination of interest rates and it is only the unanticipated component of the announcement which is important.