The Transmission of Monetary Policy via Announcement Effects

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Abstract
The traditional view of the monetary transmission mechanism rests on the premise that the Federal Reserve (Fed) has full control over overnight rates via open market operations. By contrast, this paper tries to establish empirically the Fed's ability to manipulate overnight rates via "announcement" effects. In this paper, announcement effects are defined as unanticipated public disclosures of interest rate targets in the framework of a monetary policy action, not necessarily linked to conventional open market operations. In addition to comparing the relative importance of the more conventional liquidity effect versus the announcement effect, we study the Fed's ability to affect the term structure by surprising markets with announcements of a new level for the Federal funds rate target. This is accomplished with a variation of the autoregressive conditional hazard model introduced by Hamilton and Jorda (1999).

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