THE REACTION OF INTEREST RATES TO UNANTICIPATED FEDERAL RESERVE ACTIONS AND STATEMENTS: IMPLICATIONS FOR THE MONEY ANNOUNCEMENT CONTROVERSY

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Abstract
This paper examines the reaction of long‐ and short‐term interest rates to monetary policy surprises that influenced market expectations of the future behavior of the federal funds rate in the period after October 1979. We find that the relative reaction of long‐ and short‐term rates to policy surprises is similar to the relative reaction of these rates to money announcements. Consequently, we conclude that the large reaction of long‐term interest rates to money announcements in the period after October 1979 is consistent with the “policy anticipations hypothesis” which views this reaction as a movement in real interest rates.