Anticipation of Monetary Policy and Open Market Operations

Carpenter, Seth and Demiralp, Selva (2006): Anticipation of Monetary Policy and Open Market Operations. Published in: International Journal of Central Banking , Vol. Volume, No. Number 2 (5 July 2006): pp. 25-63.

Abstract

Central banking transparency is now a topic of great interest, but its impact on the implementation of monetary policy has not been studied. This paper documents that anticipated changes in the target federal funds rate complicate open market operations. We provide theoretical and empirical evidence on the behavior of banks and the Open Market Trading Desk. We find a significant shift in demand for funds ahead of expected target rate changes and that the Desk only incompletely accommodates this shift in demand. This anticipation effect, however, does not materially affect other markets.

• Item Type: MPRA Paper
• Language: English
• Subjects: G - Financial Economics > G0 - General

References

Carpenter, S., and S. Demiralp. Forthcoming. “The Liquidity Effect in the Federal Funds Market: Evidence from Daily Open Market Operations.” Journal of Money, Banking, and Credit.

Clouse, J. A., and J. Dow. 2002. “A Computational Model of Banks’ Optimal Reserve Management Policy.” Journal of Economic Dynamics and Control 26 (11): 1787–1814.

Demiralp, S., and O. Jorda. 2002. “The Announcement Effect: Evidence from Open Market Desk Data.” Economic Policy Review 8 (1): 29–48, Federal Reserve Bank of New York.

Federal Reserve Bank of New York, Markets Group. 2005. Domestic Open Market Operations During 2004. Annual Report. New York, NY: Federal Reserve Bank of New York.

Guthrie, G., and J. Wright. 2000. “Open Mouth Operations.” Journal of Monetary Economics 46 (2): 489–516.

Hamilton, J. 1997. “Measuring the Liquidity Effect.” American Economic Review 87 (1): 80–97. ———. 1998. “The Supply and Demand for Federal Reserve Deposits.” Carnegie-Rochester Conference Series on Public Policy 49:1–44.

Hanes, C. 2005. “The Rise of Open-Mouth Operations and the Disappearance of the Borrowing Function in the United States.” Unpublished Manuscript.

Kuttner, K. 2001. “Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market.” Journal of Monetary Economics 47 (3): 527–44.

Lange, J., B. Sack, and W. Whitesell. 2003. “Anticipations of Monetary Policy in Financial Markets.” Journal of Money, Credit, and Banking 35 (6): 889–909.

Stigum, M. 1990. The Money Market. 3rd ed. Homewood, IL: Dow Jones-Irwin.