The Effects of Inflation and Money Supply Announcements on Interest Rates




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    • Baruch College, the City University of New York, and Graduate School of Business Administration, New York University, respectively. The authors appreciate helpful comments made at a seminar at the Federal Reserve Bank of Kansas City and by William Schwert, and express their thanks to Money Market Services for making the data available.


This paper examines the impact of the money supply and inflation rate announcements on interest rates. Survey data on expectations of the money supply and consumer and producer price indexes are used to distinguish anticipated and unanticipated components of the announcements. This distinction is used to test for the efficiency of the financial market response to the announcements of new information. The results indicate that the unanticipated components of the announced changes in the Producers Price Index and in the money supply have an immediate positive effect on short-term interest rates. The Consumer Price Index announcement has no apparent effect. There is no evidence of a delayed announcement effect. However, there is some indication of a liquidity effect of the money supply change on interest rates. This takes place when reserves are changing and several weeks prior to the information announcement.