Abstract
A number of studies have attempted to determine why money market interest rates are positively correlated with unanticipated increases in the money stock by examining the response of the foreign exchange and stock markets to money announcements. They report a significant positive relationship between the trade-weighted exchange rate and unanticipated increases in the money stock and a significant negative relationship between unanticipated increases in the money stock and stock prices. These results are taken as evidence in favor of the unanticipated-liquidity-effect explanation of the money market's response. This paper analyzes the response of these markets and investigates the consistency of the response to unanticipated changes in the money stock and the results appear to be sensitive to a few outliers. Furtherm,ore, all three markets generally do not respond significantly to the same money announcements. Consequently, the often-cited response of the foreign exchange and stock markets to money ann...
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