Monetary Policy Signals Research Articles

Monetary policy signaling and movements in the term structure of interest rates

This paper examines how various monetary policy signals such as repo rate changes, inflation reports, speeches, and minutes from monetary policy meetings affect the term structure of interest rates. We find that unexpected movements in the short end of the yield curve are mainly driven by unexpected changes in the repo rate. However, published inflation reports and speeches also have some impact on short rates. Speeches are found to be a more important determinant for the longer end of the term structure. Our conclusion is that central bank communication is an essential part of the conduct of monetary policy.

Security markets and the information content of monetary policy turning points

Substantial evidence shows that a significant relationship exists between Federal Reserve monetary policy signals and subsequent security returns. Recent evidence, however, suggests that Fed rate changes do not signal shifts in monetary policy and therefore have no real policy significance. In this study, we investigate whether certain Fed signals, characterized as turning points in the monetary cycle, have real policy significance. Our evidence suggests that the Fed's signal that a turning point is occurring is unambiguous, predicts a substantial shift in Fed monetary policy, and provides costless and meaningful information about future security market returns.

U.S. Treasury Primacy in Monetary Policy Signaling: A Public Choice Perspective

This note reviews the signaling models presented in the monetary economics literature, and offers a supplementary interpretation regarding the observed U.S. Treasury primacy in signaling. It is argued here that the legal authority given to the U.S. Treasury, under the Gold Reserve Act of 1934, for managing the exchange value of the dollar in international markets provides an avenue for the Treasury, and thus the Administration (i.e., the Executive Branch), to use foreign exchange intervention policy to reduce the credibility of the Federal Reserve's monetary policy. This legal relationship is likely the source of much tension between the two institutions, especially during periods for which the Administration and the Federal Reserve are at odds regarding the proper direction for monetary policy. Given that the Federal Reserve is aware of this implicit power of the Treasury, is should not be surprising that monetary policy signals from that quarter have been found to have a dominant influence on monetary policy.

The Frequency of Monetary Policy Signaling from the Administration to the Federal Reserve: Note

Recently, this Journal published a paper that reported the first hard evidence of direct and systematic Administration influence on monetary policy (Havrilesky 1988a). An index was constructed from a simple weekly sum of the number of Wall Street Journal articles that indicated whether the Administration desired either easier (+ 1) or tighter (-1) monetary policy. The index, Signaling from the Administration to the Federal Reserve, or SAFER, was premised on the notion that the financial press efficiently reports the content of the mostly informal exchanges that are occumng between the executive branch and the Fed. One problem with using this index as a means of continually measuring an Administration's influence on monetary policy and whether its signals are heeded regularly or only episodically, say as Presidential elections approach,l is that periodically the level of signaling shifts rather abruptly. For example, a precipitous drop in signaling occurred after 1984. The yearly average of the absolute value of monthly signals fell by over one-half in the 1984-1988 period compared to the 1981-1984 period, the break coming in 1985 when the yearly total of the absolute value of monthly signals fell to six as compared to twenty-two in 1984.2 Unless such shifts can be explained, standard reaction function estimation of the causes and consequences of signaling is not feasible across all time periods. This paper will attempt to explain these and other changes in signaling over the period from October 1974 to December 1989 using data on the state of the economy and the partisan composition of the Federal Reserve Board of Governors. Except for the welldocumented shift that occurred during the Reagan Administration, it will be as-

Monetary Policy Signaling from the Administration to the Federal Reserve

Monetary Policy Signaling from the Administration to the Federal Reserve