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MONEY SUPPLY ANNOUNCEMENTS AND THE MARKET'S PERCEPTION OF FEDERAL RESERVE POLICY Steven Strongin and Vefa Tarhan W orking Paper Series M acro Econom ic Issues Research D epartm ent Federal Reserve B ank o f Chicago M arch, 1990 (W P-90-3) ABSTRACT This paper Investigates the reason why Innovations 1n money supply announcements cause Interest rates to change. The paper empirically discriminates between the liquidity premium and the expected Inflation hypotheses by directly taking Into account Investor expectations regarding the Federal Reserve's monetary policy stance. The results support the liquidity premium hypothesis, and the model provides an explanation for the observed time variation 1n the response of Interest rates to money announcement surprises. Money Supply Announcements and the Market's Perception of Federal Reserve Policy Steven Strongin and Vefa Tarhan* *Steven Strongin 1s Senior Economist and Assistant Vice President, Federal Reserve Bank of Chicago. Vefa Tarhan 1s Associate Professor of Finance, J. L. Kellogg Graduate School of Management, Northwestern Univerlsty, on leave from Loyola University of Chicago. Vefa Tarhan received partial financial support for this paper from the James S. Kemper foundation. We would like to thank David Aschauer, Paul Splndt, three anonymous referees of this Journal, and the participants of the quantitative methods workshop at the Board of Governors of the Federal Reserve System and the University of Michigan Economics Department seminar series. Eric Klusman and Don Wilson provided excellent research assistance. 1 I. Introduction In this paper we examine the unsettled question of why Interest rates rose 1n response to positive Innovations mid 1980sl. 1n the money supply during the early and Two major hypotheses have been advanced 1n the literature^. The liquidity premium hypothesis holds that the market expects that the Federal Reserve will respond to a positive Innovation 1n the money supply by raising reserve pressures and thereby raising Interest rates. The alternative hypothesis, the expected Inflation hypothesis, holds that the market expects that the Federal Reserve will accommodate the excess money growth and this 1n turn will raise the market's expectations of future Inflation, again raising Interest rates. The two hypotheses have opposite assumptions about Federal Reserve behavior, yet have Identical Implications for nominal interest rates. Previous studies attempted to distinguish between the two hypotheses by examining the market's perceptions of how the Fed Intends to respond to money surprises 1n rates ) These techniques suffered from two major drawbacks. . 3 Indirect ways (e.g. by examining the reaction of exchange First, since the tests were Indirect they could at best provide Inferential evidence. Second and more Important, they Implicitly held both Federal Reserve policy and the market's perceptions of that policy constant, subjecting the models to potential parameter biases and instabilities of the sort outlined in Lucas's econometric critique [9]. Empirically, such parameter instability has been found to be large by Loeys [8 ]. We intend to show that we can both directly distinguish between the expected liquidity and expected inflation hypotheses and explain previously observed parameter Instability, by developing a model which directly accounts for the market's current perceptions of Federal Reserve policy stances. Using Irving Fisher's separation of nominal interest rates into two components, the real part and the inflation premium, we can gain some further 2 understanding of the liquidity premium and expected Inflation hypotheses. Liquidity premium hypothesis assumes that the Fed will attempt to offset unexpected money growth by restraining the availability of credit. Thus, If the Federal Reserve 1s attempting to constrain money growth to a predetermined path, then a positive Innovation 1n the money supply will force the Federal Reserve to Increase reserve pressures. The Increase In reserve pressures reduces the current supply of credit and thus raises Its real price. The expected Inflation hypothesis, on the other hand, works through the Inflation part of the Interest rate. If the Federal Reserve 1s unwilling to Increase reserve pressures enough to return monetary growth to Its original path then an Increase, at some point In the future, Is the Inevitable result. 1n the rate of Inflation This Increase 1n the rate of Inflation, while having no Immediate effect on the supply of credit, raises the Inflation premium that Investors require. However, since the market does not distinguish which part of the Interest rate becomes higher, we observe 1s 1n both cases all a higher nominal Interest rate. Most of the early attempts to distinguish directly between the two hypotheses did not yield clear-cut results because the hypotheses are not mutually exclusive. effect 1s For example, 1t was argued that since the liquidity Immediate and temporary and the expected Inflation effect should affect only the future, all that was necessary to determine which hypothesis was correct was to examine which parts of the term structure were affected. But, while the early part of the yield curve was affected the most, buttressing the case for the liquidity hypothesis, the effects lasted far too long Into the yield curve to be explained solely by short-term liquidity considerations. 1s This paradox can be easily explained 1f the Federal Reserve allowed to partially offset Innovations effects some play. 1n the money supply, allowing both 3 The key to quantifying the dual operation of these hypotheses 1s the observation that the liquidity effect should be greater the more the market 1s convinced that the Federal Reserve 1s attempting to constrain the growth of the money supply, while the Inflation effect 1s reduced by such beliefs. Thus, by correlating the market's perception of the tightness of the Federal Reserve's policy stance with the size of the Interest rate response to money supply Innovations, we can determine which of the two hypotheses dominates and also examine 1f that dominance changes with the term of the asset . 4 Intrinsic to this way of looking at the problem 1s the Idea that money supply Innovations affect Interest rates by varying amounts over time. mentioned earlier, parameter instability has been found empirically. Instability 1s As If this a natural part of the economic relationship much of the previous empirical work on this topic must be reconsidered. formally consider changes 1n the posture of monetary policy This need to 1s not surprising as both of the major hypotheses rely primarily on the effects of anticipated Federal Reserve policy. Unless the Federal Reserve's policy and consequently the market's perception of the Federal Reserve's short-run policy stance were nearly constant throughout the sample period, a model that Ignores changes in policy may not be able to cope with the phenomenon. In light of Lucas (1976), models that are designed to explain market responses 1n the context of changing monetary policy actions, need to formally take Into account shifts 1n expected monetary policy of those changes. Section II describes a model that allows the magnitude of the interest rate response to Innovations 1n the money supply to vary according to the market's perception of the contemporaneous Federal Reserve's policy stance. Section III discusses the data used 1n the estimation of the models. IV presents the empirical results. conclusions. Finally, Section V summarizes our Section 4 II. The model The usual model 1n the literature is: d 1 t= a where d 1 ^ 1s money supply. 1s positive. the change 1n 4- bMut + et the Interest rate and (1 ) 1s the Innovation 1n the The estimates of (1) reported 1n the literature Indicate that b It can be argued that, by viewing b as constant even though there were significant changes 1n the manner monetary policy was conducted, previous studies have suffered from a m1sspec1f1cat1on problem. In this study we argue that b must be viewed as a function of the market's perception of how tight the contemporaneous Federal Reserve short-run policy stance 1s. We write this: bt= c + dTt (2 ) where Tj. 1s a measure of the market's perception of Federal Reserve policy tightness.5 (2 ), 1t 1 s We claim that on the basis of the sign of the d coefficient 1n possible to empirically differentiate between the two hypotheses. To see this, assume announced money exceeds expectations. It has been established that this triggers an Increase 1n Interest rates. liquidity premium hypothesis 1s correct ( 1 .e., 1f 1t 1 s If the true that Interest rates rise because the Fed 1s expected to offset the Innovation), 1t should be the case that the tighter 1s the perception of monetary policy (high values for T^), the stronger should be the reaction of Investors (the larger the magnitude of the Interest rate Increase). This means that a positive sign for d supports the liquidity premium hypothesis. A negative sign for d, on the other hand, will be consistent with the expected Inflation hypothesis. again that announced money exceeds expected money. Assume If Interest rate Increases that accompany this event are driven by Inflationary considerations, 1t should be the case that when the Fed policy 1s perceived to be accomodatlve (low values for T^), the market's reaction should be stronger, than when the 5 monetary policy 1s considered to be tight. Such an Inverse relationship between the degree of market's reaction (size of b^) and perceived tightness (size of Tt) Implies that a negative estimate for the d coefficient will support the expected Inflation hypothesis. Substitution of equation 2 Into 1 yields: d11= 3 *■ cMjj! + dTtM^ + et (3) The primary problem 1n estimating equation (3) 1s finding a good proxy for T^. Ideally the measure used should be available on a weekly basis and reflect the market's perception of how the Fed will respond to a given Innovation 1n money. For our sample period, there 1s strong evidence Indicating that the market participants used net borrowed reserves as measure of monetary policy tightness. For example, one Fed watcher notes: "[U]nder the operating procedures 1n effect, with modifications, since late 1979, the key link between the Fed and the federal funds rate 1s the amount of reserves that the banks must borrow from the Fed's discount window. Consequently, the best single Indicator of the degree of pressure the Fed 1s putting on the reserves market 1s the amount of borrowed reserves. net borrowed reserves] 1s . . [The simply borrowed reserves minus excess reserves. Since the level of excess reserves 1s typically relatively modest, looking at one 1s often just as good as looking at the other. borrowed reserves 1s . . Nevertheless, (net) usually the best Indicator of the degree of pressure that the Fed 1s putting on the reserves market."** Investors' reliance on net borrowed reserves as an Indicator of monetary policy appears to be justified. During the sample period lagged reserve accounting (LRA) was 1n effect. LRA has the Interesting property that 1t cleanly separates supply and demand shocks 1n the reserve market. The demand for reserves 1s set two weeks before the reserves are actually held. changes 1n Thus, the borrowed-non-borrowed reserve mix ( 1 .e. reserve pressures) that 6 occur can be attributed almost 1n their entirety to Federal Reserve actions . 7 The only exception to this 1s excess reserve demand. However, since this 1s both small and usually fully accommodated by the Federal Reserve, 1t can be subtracted from borrowings. Net borrowed reserves obtained 1n this manner performs well as a tightness measure since the level of net borrowed reserves 1s simply the arithmetic difference between the amount of reserves banks need to have to satisfy their reserve requirements and the amount which the Fed 1s willing to supply. While It appears that the actual level of net borrowed reserves 1s a good proxy for the degree of tightness 1n monetary policy and was used as such by Investors, what is needed for our model tightness. 1s the market's perception of For this we used a survey of expected net borrowed reserves that money market services conducted on a weekly basis. Thus, the model we estimate becomes : 8 dit = a + cMut + dBet Mut + et (4) where B| is expected net borrowed reserves, and u* is the estimation error. III. The Data The sample period for this study 1s May 2, 1980 to January 6 , 1984. The eleven interest rates used are the Federal funds rate, the rates on Treasury bills of 3,6, and 12 months maturities, and constant maturity security rates (1,3,5,7,10,20 and 30 years). Summary statistics on the variables used 1n this study are provided in Table 1. Surveys of money supply and net borrowed reserves expectations are obtained from the Money Market Services . 8 Both were conducted on Tuesdays and measured fifty to sixty market participants' responses. The "money supply survey" solicited participants' estimates of the change 1n Ml from one week to the following week to be announced on the coming Friday.I 8 7 Note that the actual Ml change took place during the statement week that ended nine days prior to an announcement (see Figure 1). Also, market participants already had information about the actual level of the reserves for the statement week in question. The major source of the uncertainty about the money figure to be announced was that the market did not know how the Fed's actions (supply of reserves) and the activities of the public (currency and the type of deposits the public chose to hold) interacted to create the equilibrium level of M l . In the "net borrowed reserves survey" the survey participants were asked each Tuesday to estimate what the Fed's net borrowed reserves target for the current statement week, ending the next day (Wednesday), was going to be. (See Figure 1). Net borrowed reserves is defined as adjusted borrowings minus excess reserves (where adjusted borrowing is defined as total borrowings minus extended credit). reserves. Thus, net borrowed reserves is the negative of free As discussed above, higher values for this variable indicate monetary tightness. Figure 1 Time line for money supply and net borrowed reserves target surveys r<£ A <2^ .ey A V • • • Tue Wed Thu Fri Sat Sun Mon Tue Wed 1 Week 1: MlB change takes place 7 -> 10 11 12 13 14 15 16 17 18 19 20 21 <-------------------------------------------> The survey respondents ex press opinion about the Fed's net borrowed re serve target for this time period. X 8 As shown in Figure 1, survey participants reveal their expectations on Tuesday, Day 13, about the money supply for the statement week that ended six days before, 1.e., days 1-71 1 *1 2 . On Friday, Day 16, the actual money supply for the week that ended on the 7th 1s announced. The market's policy expectations regarding the Fed's net borrowed reserves target for the statement week covering days 15-21 are expressed on the Tuesday following the announcement (Day 20). 16). The announcement surprise Is discovered on Friday (Day In this study the market's response 1s measured on the following Monday.13 on Tuesday, Day 20, the market participants are asked to express their views on the Fed's target net borrowed reserves figure for days 15-21. They already know the extent of money deviation, and have responded to 1t on Monday on the basis of what they think the Fed will do (they have watched the Fed on Thursday, Friday, and Monday). Thus, on that Tuesday they reveal their beliefs about how the Fed decided to respond to the money shock.I 4 The net borrowed reserves survey data were examined for unbiasedness, efficiency, and forecast performance.^ The results of these tests are summarized 1n Table 2 . 1 6 To test for unbiasedness, the following equation 1s estimated. = ao + ai where + et (5) 1s the actual net borrowed reserves. The survey data 1s considered to be unbiased 1f ag = 0 and a-| = 1. test results Indicate that unbiasedness cannot be rejected at the 10% The level of significance. The efficiency test considered 1s based on the premise that 1f the actual data on net borrowed reserves are generated by an autoregressive process, the market's expectation should conform with the same process. This Implies that the lagged values of the actual data should turn out to be Insignificant as 9 explanatory variables forecast errors. rejected at the 1n an equation where the dependent variable measures the The results 1n Table 10% 2 show that efficiency cannot be significance level. The third test is concerned with the forecast performance of the survey data. In this test the forecast performance of the survey data 1s compared with that of a simple autoregressive model. As can be seen from Table 2, the root mean square error associated with the survey 1s lower than that of the simple autoregressive model. IV Empirical results Equation (4) was estimated for the eleven interest rates by the ordinary least squares procedure. The OLS estimates are reported 1n Table 3 . ^ Additionally the equations were estimated using an autoregressive procedure and checked for heteroscedastldty. The results Indicated that no corrections were necessary and therefore we do not report those regressions. It appears that interest rates of all maturities respond significantly to money announcement surprises. positive sign. increases. In all cases the c coefficient has the expected In general, the size of the response declines as maturity This result is along the same lines as those reported in the literature J ® As can be seen from Table 3, the sign of the d coefficient is positive across the maturity spectrum, supporting the liquidity premium hypothesis. What is more, ignoring the Fed funds equation for the moment, the coefficient in question declines both in magnitude and in statistical significance as maturity increases.^ This implies that the expected liquidity effect is the dominant factor in the response of the short-term rates (up to three years). Its influence declines beyond three years. The fact that the estimates of this coefficient are statistically significant only in the equations for short-term Interest rates 1s additional evidence 1n favor of the liquidity 10 premium hypothesis. If Interest rates are responding to money surprises because of expected liquidity considerations (and not due to changes 1n Inflationary expectations) the response should by and large be confined to the shorter end of the maturity spectrum. While the empirical evidence presented In Table 3 shows the existence of strong expected liquidity effects for maturities up to three years, appears that changes 1n also Inflationary expectations play at least a minor role 1n the response of longer-term Interest rates. 1s 1t Since the expected sign for d negative for the expected Inflation, but positive for the liquidity premium hypothesis, the positive sign of the estimated d coefficient 1s consistent with a scenario where both effects are present, but the liquidity effect dominates Inflation considerations. It 1s conceivable that, as the term to maturity Increases, the Importance of liquidity effects decline relative to expected Inflation effects, with neither dominating. There are a number of possible explanations of this. of monetary policy 1s If a classical view assumed, then the liquidity effects would decline through time and the inflationary effects grow. This Is because, while the Federal Reserve may be able to raise real rates temporarily by reducing the rate of monetary growth, such effects dissipate as time passes. reduction 1n the rate of monetary growth 1s not all the way back to previous money growth expectations, Inflation will rise. effects predominate 1n If the In this case, liquidity the early part of the term structure, but, depending on the extent to which money growth 1s allowed to stay above previous expectations, Inflation effects will be relatively stronger on the longer end of the term structure. An equivalent explanation of the behavior of the coefficient across the maturity spectrum follows from a belief that the Federal Reserve will tighten 11 for some period of time, but will ease policy at some point 1n the future. This 1s also a mixed hypothesis, but the mix occurs across time, rather than at a point 1n time. One puzzle that needs to be addressed 1s that the estimate for the d coefficient 1n the Federal funds rate equation 1s Insignificant. argued that the expected liquidity effect should be largest 1n because the underlying Instrument has the shortest maturity. It might be this equation Urlch and Wachtel, [20] for Instance, claim that the strong reaction of the funds rate to the money Innovations hypothesls.^0 1s evidence supporting the expected liquidity However, this 1s not necessarily the case. The Increase 1n the funds rate, triggered by a positive Innovation in money, does not necessarily mean the Fed Intends to offset the Innovation. to the lagged reserve accounting. The reason for this 1s related Under this regime, which was 1n effect during the sample period, the reserve requirements of banks are set two weeks before reserves are actually held. The money figure 1s announced with a nine-day lag, which means banks are already period when the announcement 1s made. 2 days into the reserve settlement Prior to the money announcement, the banks' assessment of the banking system's reserve demand is determined on the basis of expected money. When actual money exceeds expectations, the banks' estimate of the system's demand for reserves must be revised upwards, since the demand for reserves will be higher than expected. This could cause the Fed funds rate to go up regardless of expected Federal Reserve policy. Further, since the Federal Reserve does not allow intertemporal arbitrages 1n the reserve market, future actions on the part of the Federal Reserve should not have any affect . 2 1 To see that even under conditions of Inflationary expectations, the Federal funds rate may go up, consider a positive innovation 1n money. Assume 12 also that the Fed Intends to accomodate this shock, and the market expects the Fed to behave 1n this manner. Even under these conditions, the funds rate will go up unless the Injection of reserves by the Fed 1s both Immediate and 1s of such a magnitude that reserves. 1t completely offsets the excess demand for The funds rate may Increase 1n spite of an accomodatlve policy environment since the banks operate under a constraint in which the reserve requirements need to be met 1n the current reserve week. Thus, the fact that the funds rate rises 1n reaction to positive Innovations 1n money should not be considered evidence that the market expects the Fed to offset the Innovations 1n money. Based on our empirical results, 1n the fed funds market the reserve demand Implications of money shocks under lagged reserve accounting apparently dominate any expected liquidity or Inflation premium considerations. This appears to be the primary reason for a positive and significant c and a small and Insignificant d 1n the Fed funds rate equation. Table 3 also Includes the average response of Interest rates to money announcements, calculated in the following manner: bit = C! + di Be (6) where c^ and d^ for each Interest rate 1s obtained from the estimation of (3) and Be 1s the average value of the expected net borrowed reserves for the sample period. Figures 2 and 3 show the estimated response of each Interest rate to money surprises over time. A A This response 1s calculated by A bit = cj + dj Bt (?) where, as before, the slope and Intercept coefficients are obtained from estimating (4) and B® 1s the value of the market's weekly forecast of net borrowed reserves. The response of Interest rates over time appears to be 13 similar to those reported by Loeys [8 ], who estimated the reaction of Interest rates to money by 'moving' regressions. The sample length In h1s regressions 1s fixed at one year, but each subsample moves over the at 2 -month 6 -year master sample Intervals. To better see the extent of the similarity, we duplicated his results for our sample period, using the rolling regression methodology he employed. used 48 week subsample periods 1n the rolling regression. We Then, we constructed the time path of Interest rate response coefficients from our model by bit - cj ♦ where “6 1s i* (8) the expected net borrowed reserves averaged for each rolling regression subsample period. The time paths for the 90-day Treasury bill rate response coefficients obtained from h 1 s model and our model are graphed together 1n Figure 4. The similarity between the two time paths, especially “0 over the period when there 1s complete Information on B^. 1s striking. Estimating (4) by use of a rolling regression methodology, and testing 1f the estimate for the parameter c (and d) 1s relatively constant throughout the sample period would show the extent our model explains the time variation found by Loeys.22 To test whether or not c varies over the sample period, we estimated the following equation d 1t = a + cM^ + c'M^ I(Si) + dM^ B| + d'M^ B| I(si) + et where I(si) 1s an Indicator function which takes on a value of subsample period, and zero otherwise. whether or not the coefficient the rest of the sample period. c^. 1n (9) 1 for each The level of significance on c^ tests each subsample period differs compared with Figure 5 plots the values associated with In our sample period there are 22 subsample periods. As can be seen from Figure 5, we are unable to reject the null hypothesis of constancy 1n any of the cases. 14 The t values associated with are plotted 1n Figure constancy cannot be rejected 1n any of the cases. 6 , and again Thus c and d Individually do not have time-varying character that Loeys found. As an additional point of Interest, while our sample period does not Include the October 1979 period, 1t does cover fall 1982 when the Fed made a major policy change by deemphasizing Ml. was a critical period, 1n Both Figures 2 and 3 show that this that the reaction of Interest rates shows a marked difference after fall 1982. However, when the parameter stability tests are done by splitting the sample period at October 1982, we find no evidence of structural Instability 1n our model, unlike the standard models such as Loeys' which show substantial Instability. This can be seen 1n the F statistics reported 1n Table 3. V. Summary and Conclusions This paper attempts to distinguish between alternative hypotheses regarding the positive correlation between money announcement surprises and Interest rates. The Issue was examined directly by taking Into account investor expectations about the Fed's net borrowed reserves target Immediately following an announcement surprise. The ability of the estimates obtained from our model to mimic the results of a rolling regression methodology used by Loeys Indicate that reduced-form models that allow for policy changes can be useful across different policy regimes. Based on our empirical results the conclusions of this paper can be summarized: 1) Interest rates respond to unanticipated money. 2 ) The magnitude of this response declines with the maturity of the Instrument. 3) The expected liquidity hypothesis explains the reactions at the shorter end of the maturity spectrum. 4) While the liquidity effects s t m outweigh the Inflation premium effects, the reaction of the long rates appears to be caused 15 by the combination of both factors. 5) The response of the Fed funds rate cannot be explained by either effect, but Instead by the peculiar way money shocks are transmitted to the reserves market under lagged reserve accounting. 6) While the reaction of Interest rates change after October 1982, there 1s no evidence of structural Instability. 7) The Inclusion of a policy variable explains previously documented Instabilities estimates. 1n parameter Footnotes ^In recent years, the effect of money supply announcements on interest rates has been studied extensively (Cornell [1, 3], Urich and Wachtel [19, 20], Roley [15], Grossman [6 ]). The impact of unanticipated movements in money on stock returns (Pearce and Roley [13, 14] and Lynge [10], and on foreign exchange rates has also been investigated (Hardouvelis [7], Cornell [2], Engel and Frankel [5]). Generally, these studies find that the anticipated component of money supply announcements has no effect on capital market prices. On the other hand, unanticipated changes in money generate an interest-rate response in the same direction that is both significant and prompt. Both short- and long-term interest rates are affected. These studies also find that the impact of announcement shocks on market rates became more pronounced following the Federal Reserve's decision in October 1979 to switch to an operating procedure that targeted nonborrowed reserves, and then declined again following the policy to deemphasize-Ml in October 1982. ^Additionally, signalling models have been advanced in the literature to explain the reaction of interest rates to money announcement surprises. For example, see Cornell [4], Siegel [16] and Nicholas, Small and Webster [1 2 ]. In Cornell's case, money surprises are a signal about future real activity. In Siegel's model, the announced money supply reveals information both about the current and future state of real economic activity. The response of interest rates depends upon the variance-covariance matrix of real output, interest rates, and money. Nicholas, Small, and Webster [12], argue that when announced money exceeds expectations, this is a signal that future money demand will be higher. This being the case, they argue that interest rates will rise in response, 1 f investors believe that the shock to money demand will dissipate more slowly than the equally large shock to money supply. Cornell [4], proposes another channel through which money surprises may cause interest rates to change. He argues that innovations in money announcements may influence nominal interest rates by affecting the aggregate level of risk aversion. The goal of this paper is to empirically discriminate between the liquidity premium and expected inflation hypotheses. Our model in its present form does not enable us to assess the empirical content of the signalling and risk premium hypotheses. •^Attempts have been made in the literature to discriminate between these two hypotheses on empirical and theoretical grounds. Engel and Frankel [5], for example, study the response of exchange rates to money announcements. They suggest that the spot value of the dollar (vis-a-vis the German mark in their study) would increase when money exceeds expectations if the expected liquidity hypothesis is correct, and decline if the inflation premium hypothesis holds. The empirical results presented in their study support the expected liquidity hypothesis. Cornell [2] also comes to the same conclusion on the basis of examination of the exchange rates between the dollar and five other currencies. However, Cornell in another paper [3] argues that the strong reaction of long term bond rates to money announcements is compatible with the inflation premium hypothesis. Cornell [4] carefully lays out and tests the implications of the expected liquidity and the inflation premium hypothesis, as well as the risk premium and signalling models. While he does find that money supply announcements have an impact on the real rate, he concludes that no single hypothesis fully explains the data. 17 Hardouvells [7], extends the previous empirical work by using forward exchange rates and also by examining the response of expected future exchange rates and foreign Interest rates. Like Cornell, he concludes that, taken 1n Isolation, neither of the two hypotheses 1s consistent with the data. He Instead offers an alternative hypothesis which combines the two hypotheses 1 n question. He argues that h1s results are compatible with a scenario where both the expected liquidity and Inflation premium effects are present. 4 It Is conceivable that both effects are present simultaneously. Some plausable scenarios where both factors may be present simultaneously are discussed below. Since the two hypotheses Imply opposite signs for the d coefficient, 1 n our model, the term "dominance" 1 s used simply to refer to the fact that, 1 f both effects are present, the sign of the estimated d coefficient can be Interpreted to mean that one effect outweighs the other. ^The market's perception of "tightness" refers to how the market participants view the current short-run Federal Reserve monetary stance conditional on their current Information set-1n other words, given the prevailing conditions 1n the economy (GNP growth, the unemployment level, the Inflation rate etc.), the degree of monetary restraint they think the Fed Intends to follow. 6See Melton, William C. Inside the Fed, pp. 129-30. Splndt and Tarhan [17] develop an algorithm for the manner 1n which operating procedures were conducted 1n the post 1979 period. ^Note that monetary policy that relied on free reserves was criticized 1n the 1960s for Its 1ndeterm1nancy. However, during this period contemporaneous reserves accounting was 1n effect. Under this reserve accounting regime, 1t 1 s difficult to sort out the demand and supply shocks 1 n the reserves market. ®Tests were performed to determine 1f a nonlinear specification might have been more appropriate. However, polynomial and other standard transforms did not provide any additional explanatory power. Additionally, the expected Fed funds rates was used as a proxy variable for monetary policy tightness. Our results Indicated that the funds rate was not a good Indicator of degree of tightness 1n monetary policy. We estimate our model for a sample period that starts on May 2, 1980 because our data on net borrowed reserves survey start on this date. ^We would like to thank Raul N1cho and K1m Rupert of the Money Market services for making the data available to us. l^Money announcements were made on Thursdays prior to February 8 , 1980. Since February 16, 1984 the announcement day has been switched back to Thursdays. During the sample period, the announcement days did not always fall on a Friday due to holidays. To measure the response of Interest rates over a consistent length of time, all non Friday announcement dates were deleted from the sample, a loss of 17 observations. ^ O n the same day, they also express their opinions regarding the expected net borrowed reserves for the statement week covering days 8-14. This, however, 1s not marked on the diagram so as not to cause confusion. The relevant net borrowed reserves survey for our purposes 1 s the one that takes place on Tuesday the 20th. 18 ^ O n l y the median value of the survey is made public. Information on the distribution of responses. The subscribers get !3in some studies the market response 1s measured from 3:30 to 5:00 p.m. on the day of the announcement. Other studies measure the response over close of business on announcement day and the opening rates the following day. In this study we measure the responses over closing rates on announcement dates and the closing rates the following business day. 14A referee pointed out the possibility that Tuesday's survey responses may be affected by Monday's Interest rates. This has the potential to generate an Inconsistent estimator problem. We believe that relying on a survey that 1s conducted on the Tuesday following the money supply Innovation enables us to use the most up-to-date market assessment of expected Fed behavior. However, reestimating the model with previous Tuesday's survey data produced essentially Identical results. This Indicates that Information biases Introduced by the timing of the survey are small. ^ P e a r c e and Roley [13] conduct these tests for the survey data on expected money. Their results show that the money survey data passes the tests of unbiasedness and efficiency and has lower RMSE compared with an autoregressive model of actual money. l^Note that the survey data reveal the Investors' perception of the expected Fed policy. Thus all tests conducted are joint tests of unbiasedness, efficiency, etc., and also the hypothesis that the Fed 1s able to achieve Its net borrowed reserves objectives. 17The survey on money 1s conducted on Tuesdays but the money 1s announced on Fridays. Since expectations can change between Tuesday and Friday, the difference between the announced and expected money may not truly represent the "surprise". To overcome this potential problem, Roley [15] suggests that changes 1n the fed funds rate from Tuesday to Friday can be used as a proxy for the change 1n expectations. We estimated [4] with this correction. The variable 1n question turned out to be Insignificant. Additionally, 1t did not affect the relative sizes and significance of the estimates for the other variables. ^®For example, Cornell [3] finds that the magnitude of the fed funds rate response 1 s the largest and 1 s about three times the response shown by the 30-year bond rate. ^ T h e decline 1n the size of the coefficients 1s not monotonic. In fact the estimated coefficient for the 1 -year bond exceeds that of the 1 2 -month bills. This however 1s not unexpected since bonds pay coupons and have lower effective maturities relative to bills, and also bills are quoted on a discount basis. 2 0 Hardouvel1s [7] makes a point 1n a footnote which 1s similar to Urlch and Wachtel's argument. He claims that the strong reaction of the Fed funds rate under lagged reserve accounting regime supports the expected liquidity hypothesis. 19 2^Under the Lagged Reserve Accounting regime, a bank could carry forward a surplus or deficit up to two percent of Its required reserves provided 1 t does not carry forward deficits two weeks 1n a row. However, this 1n all likelihood did not change the Intertemporally segmented nature of the market, since the size of the carryover provision 1s rather Insignificant. See Splndt and Tarhan [18] for the Implications of the carryover provision 1n an Intertemporal reserve arbitrage framework. 22We are Indebted to an anonymous referee for his suggestion that we pursue just how much of the time variation documented by Loeys 1s captured by our model. 20 References 1. Cornell, Bradford. "Do Money Supply Announcements Affect Short-Term Interest Rates." Journal of Money Credit and Banking 11 (February 1979). 2. ________________ . "Money Supply Announcements, Interest Rates, and Foreign Exchange Rates." Journal of International Money and Finance (August 1982), 201-08. 3. ________________ . "Money Supply Announcements and Interest Rates: View." Journal of Business 56 (January 1983), 1-23. Another 4. ________________ . "The Money Supply Announcement Puzzle: Review and Interpretation." American Economic Review 83 (September 1983), 644-57. 5. Engel, Charles M. and Jeffery A. Frankel. "Why Interest Rates React to Money Announcements: An Explanation from the Foreign Exchange Markets." Journal of Monetary Economics 13 (January 1984), 31-39. 6 . Grossman, Jacob. "The Rationality of Money Supply Expectations and the Short Term Response of Interest Rates to Monetary Surprises." Journal of Money Credit and Banking 13 (November 1981), 409-24. 7. Hardouvells, G1kas. "Market Perceptions of Federal Reserve Policy and the Weekly Monetary Announcements." Journal of Monetary Economics 14 (September 1984), 225-40. 8 . Loeys, Jan. "Changing Interest Rate Responses to Money Announcements: 1977-1983." Journal of Monetary Economics 15 (May 1985), 323-32. 9. Lucas, Robert E., Jr. "Econometric Policy Evaluation: A Critique." Journal of Monetary Economics 1., Suppl. (1976), 19-46. 10. Lynge, Morgan. "Money Supply Announcements and Stock Prices." of Portfolio Management 8 (Fall 1981), 40-43. 11. Melton, William C. 1985. Inside the Fed Homewood. Illinois: Journal Dow-Jones Irwin, 12. Nicholas, Donald A., David H. Small, and Charles E. Webster, Jr. "Why Interest Rates Rise When an Unexpectedly Large Stock of Money 1s Announced" American Economic Rev1ew73 (June 1983), 383-88. 13. Pearce, Douglas D. and Vance Roley. Unanticipated Changes 1n Money: (September 1983), 1323-33. "The Reaction of Stock Prices to A Note." Journal of Finance 38 14. _______________ . "Stock Prices and Economic News." 58 (January 1985), 49-67. Journal of Business 15. Roley, Vance. "The Response of Short-Term Interest Rates to Weekly Money Announcements." Journal of Money Credit and Banking 15 (August 1983), 344-54. 21 References (cond't) 16. Siegel, Jeremy J. "Money Supply Announcements and Interest Rates: Does Monetary Policy Matter?" Journal of Monetary Economics 15 (March 1985), 163-76. 17. Splndt, Paul A. and Vefa Tarhan. “The Fed's New Operating Procedures: A Post-Mortem. Journal of Monetary Economics 19 (January 1987), 107-23. 18. _______________ . "Bank Reserve Adjustment Process and Use of Reserve Carryover as a Reserve Manaaement Tool." Journal of Banking and Finance 8 (March 1984), 5-20. 19. Urlch, Thomas and Paul Wachtel. "Market Response to the Weekly Money Supply Announcements 1n the 1970s." Journal of Finance 36 (December 1981), 1063-72. 20. Urlch, Thomas and Paul Wachtel. "The Effects of Inflation and Money Supply Announcements on Interest Rates." Journal of Finance 39 (September 1984), 1177-88. Table 1 Summary Statistics on Selected Variables Mean BA be MA me FF TB3 TB 6 TB12 CM1 CM3 CM5 CM7 CM10 CM20 CM30 (MAm e )(Be) 466.14 504.98 0.71 0.34 0.037 0.049 0.057 0.029 0.036 0.026 0.029 0.030 0.027 0.023 -0.024 -17.99 Stnd. Dev. 578.04 527.79 2.88 1.57 0.047 0.31 0.29 0.23 0.29 0.22 0.20 0.18 0.16 0.16 0.15 1790.9 M1n. Value -456 -300 -5.9 -4.2 -1 . 8 6 -0.94 -0.78 -0.61 -0.77 -0.77 -0 . 6 8 -0.58 -0.55 -0.45 -0.47 -6480 Max Value Stnd. Error of Mean 2276 2000 11.4 0.21 6.8 0.11 1.48 1.34 1.17 0.036 0.023 0.022 0.88 0.018 1.1 0.022 0.83 0.72 0.58 0.50 0.49 -0.47 7800 0.017 0.015 0.014 0.013 Ba = Actual net borrowed reserves B e = Expected net borrowed reserves m A = Actual (announced) money M e = Expected money CM1, CM3. CM5, CM7, CM10, CM20, CM30 = constant maturity bond rates of 1, 3, 5, 7,, 10, 20 30 years, i(All Friday to Monday closings) TB3, TB 6 , TB12 = Returns on T-b111 rates of 3 mos, 6 mos and 1 2 mos. FF = Fed funds rate (Friday close to Monday close). 43.82 40.012 0.012 0.012 135.77 Table 2: Tests on Net Borrowed Reserves Target Survey Data B^ = ap + a, BE . Uf Unbiasedness: Summary Statistics Coefficient estimates a0 al -12.35 (-0.4) Efficiency: 0.94 ( 2 2 .6 ) B^ - B^ = bQ + b-| F(2,172) Prob>F 0.75 2.14 2.33 0.09 (-0.97) (1.09) (0.1) 0.05 1.91 2.10 Ba = Survey Forecast Performance: c0 + C1 ®t_-| + c 2 t§ 2 Prob>F 0.08 * c3t-3 Summary Statistics Forecast RMSE Cl C2 C3 C4 63.2 0.33 0.21 0.19 0.09 R2 D.W Auto Survey (1.5) (4.4) (2.71) (2.49) (1.17) 0.53 1 .97 391.46 291.19 c0 Notes: t - statistics are reported in parentheses. Ba = actual net borrowed reserves, t BE = Market's perception of the Fed's net borrowed reserves * target as indicated by the survey data. R 2 = multiple correlation coefficient. D-W = Durban Watson statistic. Auto = the autoregressive model II F(4.165) O D.W .Q R2 II -0.0 CO 0.06 II -0.05 JOt Ho: bg = II Summary Statistics CM -Q (0.2) (-1.7) D-W b,tBA . b3tBA ♦ b<tBA + ut b4 b3 1 R* J3 -Q C\J -Q O -0.1 -Q 6.4 b A_,* ai = Ho: ag = 0, Table 3 Market Response to Money Supply Announcements u u r d1* = a t c H t di H * BE, * e+ 1 t t t 1 Dependent Variable a XI 0 2 c XI02 FF 2.38 (0.7)2 4.15 (1.9) 4.7 (2.3) 2.03 (1 .2 ) 2.49 (1.3) 1.73 (1 .2 ) 2.14 (1 .6 ) 2.30 (1 .8 ) 2.15 (1 .8 ) 1.88 (1 .6 ) 2.01 (1.7) 4.37 (1.9)2 2.37 (1.7) 3.17 (2.4) 2.87 (2 .8 ) 3.49 (2.7) 2.91 (3.0) 2.57 (2.9) 2.4 (3.0) 1.75 (2.3) 1.39 (1 .8 ) 1.34 (1.7) TB3 TB 6 TB12 CM1 CM3 CM5 CM7 CM10 CM20 CM30 d XI05 -.25 (-.08)2 5.90 (3.3) 4.43 (2 .6 ) 3.27 (2.4) 4.19 (2.5) 2.74 (2 .2 ) 2.03 (1.7) 1.55 (1.5) 1.43 (1.4) 1.24 (1.24) 1.36 (1.39) B^ = expected net borrowed reserves . t bt = c *■ -r di BE t bt 0 X102 D-W 4.1 2.7 0.041 22.0 1.7 0.221 22.2 2.0 0.222 23.1 2.0 0.221 23.8 2.0 0.238 23.5 2.0 0.235 20.0 2.1 0.201 18.3 2.1 0.183 13.6 2.0 0.136 9.5 2.0 0.096 10.2 2.0 0.102 r2 F-Testl for stability 1.48 (0.32)3 0.57 (.64) 0.92 (.43) 0.80 (.49) 0.69 (.56) 0.63 (.60) 0.85 (.46) 0.75 (.53) 0.37 (.46) 0.98 (.40) 1.19 (0.3) M^= unanticipated money FF = fed funds rate. TB3 = 3 month T-b111 rate, TB 6 = 6 month T-b1ll rate ., TB12 = 1 year T-b1ll rate, CM1 to CM30 are one-year constant maturity rate to 30- year constant maturity Treasury bond rates. lF-test 1s a chow test for stability of parameters with Oct 1982 as the sample split date. ^T ratios. 3p-values. Figure2 The value of b t through time: the bills C o efficien t 0.15 h------ 0.12 . 0.09 0.06 . 0.03 0.00 80 81 82 83 84 Figure3 The value of bf through time: the bonds Coefficient 0.15 h- 0.12 . 0.09 . 0.06 . 1-yr. bond 3-yr. bond 0.03 . I ,^5-yr. bond Wx-'~'-7-yr. bond 10-yr. bond 20-yr. bond 30-yr. bond 0.00 . 80 81 82 83 84 Figure 4 Time path of interest rate response coefficients (90-day treasury bill rate) Coefficient 0.14 -i----- 0.12 . 0.10 . 0.08 . 0.06 . 0.04 . 0.02 - 0.00 _ 80 81 82 83 84 Figure5 f-statistics for estim ates of c across roiling regression subsam ple periods (90-day treasury bill rate) t statistic 81 82 83 84 Figure6 f-statistics for estim ates of d across rolling regression subsample periods (90-day treasury bill rate) t statistic Federal Reserve Bank of Chicago RESEARCH STAFF MEMORANDA, WORKING PAPERS AND STAFF STUDIES The following lists papers developed in recent years by the Bank’s research staff. Copies of those materials that are currently available can be obtained by contacting the Public Information Center (312) 322-5111. Working Paper Series—A series of research studies on regional economic issues relating to the Sev enth Federal Reserve District, and on financial and economic topics. Regional Economic Issues *WP-82-l Donna Craig Vandenbrink “The Effects of Usury Ceilings: the Economic Evidence,” 1982 David R. Allardice “Small Issue Industrial Revenue Bond Financing in the Seventh Federal Reserve District,” 1982 WP-83-1 William A. Testa “Natural Gas Policy and the Midwest Region,” 1983 WP-86-1 Diane F. Siegel William A. Testa “Taxation of Public Utilities Sales: State Practices and the Illinois Experience” WP-87-1 Alenka S. Giese William A. Testa “Measuring Regional High Tech Activity with Occupational Data” WP-87-2 Robert H. Schnorbus Philip R. Israilevich “Alternative Approaches to Analysis of Total Factor Productivity at the Plant Level” WP-87-3 Alenka S. Giese William A. Testa “Industrial R&D An Analysis of the Chicago Area” WP-89-1 William A. Testa “Metro Area Growth from 1976 to 1985: Theory and Evidence” WP-89-2 William A. Testa Natalie A. Davila “Unemployment Insurance: A State Economic Development Perspective” WP-89-3 Alenka S. Giese “A Window of Opportunity Opens for Regional Economic Analysis: BEA Release Gross State Product Data” WP-89-4 Philip R. Israilevich William A. Testa “Determining Manufacturing Output for States and Regions” WP-89-5 Alenka S.Geise “The Opening of Midwest Manufacturing to Foreign Companies: The Influx of Foreign Direct Investment” WP-89-6 Alenka S. Giese Robert H. Schnorbus “A New Approach to Regional Capital Stock Estimation: Measurement and Performance” **WP-82-2 *Limited quantity available. **Out of print. Working Paper Series (cont'd) WP-89-7 William A. Testa “Why has Illinois Manufacturing Fallen Behind the Region?” WP-89-8 Alenka S. Giese William A. Testa “Regional Specialization and Technology in Manufacturing” WP-89-9 Christopher Erceg Philip R. Israilevich Robert H. Schnorbus “Theory and Evidence of Two Competitive Price Mechanisms for Steel” WP-89-10 David R. Allardice William A. Testa “Regional Energy Costs and Business Siting Decisions: An Illinois Perspective” WP-89-21 William A. Testa “Manufacturing’s Changeover to Services in the Great Lakes Economy” WP-90-1 P.R. Israilevich “Construction of Input-Output Coefficients with Flexible Functional Forms” Issues in Financial Regulation WP-89-11 Douglas D. Evanoff Philip R. Israilevich Randall C. Merris “Technical Change, Regulation, and Economies of Scale for Large Commercial Banks: An Application of a Modified Version of Shepard’s Lemma” WP-89-12 Douglas D. Evanoff “Reserve Account Management Behavior: Impact of the Reserve Accounting Scheme and Carry Forward Provision” WP-89-14 George G. Kaufman “Are Some Banks too Large to Fail? Myth and Reality” WP-89-16 Ramon P. De Gennaro James T. Moser “Variability and Stationarity of Term Premia” WP-89-17 Thomas Mondschean “A Model of Borrowing and Lending with Fixed and Variable Interest Rates” WP-89-18 Charles W. Calomiris “Do "Vulnerable" Economies Need Deposit Insurance?: Lessons from the U.S. Agricultural Boom and Bust of the 1920s” WP-89-23 George G. Kaufman “The Savings and Loan Rescue of 1989: Causes and Perspective” WP-89-24 Elijah Brewer III “The Impact of Deposit Insurance on S&L Shareholders’ Risk/Return Trade-offs' *Limited quantity available. **Out of print. Working Paper Series (c o n t'd ) Macro Economic Issues WP-89-13 David A. Aschauer “Back of the G-7 Pack: Public Investment and Productivity Growth in the Group of Seven” WP-89-15 Kenneth N. Kuttner “Monetary and Non-Monetary Sources of Inflation: An Error Correction Analysis” WP-89-19 Ellen R. Rissman “Trade Policy and Union Wage Dynamics” WP-89-20 Bruce C. Petersen William A. Strauss “Investment Cyclicality in Manufacturing Industries” WP-89-22 Prakash Loungani Richard Rogerson Yang-Hoon Sonn “Labor Mobility, Unemployment and Sectoral Shifts: Evidence from Micro Data” WP-90-2 Lawrence J. Christiano Martin Eichenbaum “Unit Roots in Real GNP: Do We Know, and Do We Care?” WP-90-3 Steven Strongin Vefa Tarhan “Money Supply Announcements and the Market’s Perception of Federal Reserve Policy” *Limited quantity available. **Out of print. 4 Staff Memoranda—A series of research papers in draft form prepared by members of the Research Department and distributed to the academic community for review and comment. (Series discon tinued in December, 1988. Later works appear in working paper series). **SM-81-2 George G. Kaufman “Impact of Deregulation on the Mortgage Market,” 1981 ♦♦SM-81-3 Alan K. Reichert “An Examination of the Conceptual Issues Involved in Developing Credit Scoring Models in the Consumer Lending Field,” 1981 Robert D. Laurent “A Critique of the Federal Reserve’s New Operating Procedure,” 1981 George G. Kaufman “Banking as a Line of Commerce: The Changing Competitive Environment,” 1981 SM-82-1 Harvey Rosenblum “Deposit Strategies of Minimizing the Interest Rate Risk Exposure of S&Ls,” 1982 *SM-82-2 George Kaufman Larry Mote Harvey Rosenblum “Implications of Deregulation for Product Lines and Geographical Markets of Financial Instititions,” 1982 *SM-82-3 George G. Kaufman “The Fed’s Post-October 1979 Technical Operating Procedures: Reduced Ability to Control Money,” 1982 SM-83-1 John J. Di Clemente “The Meeting of Passion and Intellect: A History of the term ‘Bank’ in the Bank Holding Company Act,” 1983 SM-83-2 Robert D. Laurent “Comparing Alternative Replacements for Lagged Reserves: Why Settle for a Poor Third Best?” 1983 **SM-83-3 G. O. Bierwag George G. Kaufman “A Proposal for Federal Deposit Insurance with Risk Sensitive Premiums,” 1983 *SM-83-4 Henry N. Goldstein Stephen E. Haynes “A Critical Appraisal of McKinnon’s World Money Supply Hypothesis,” 1983 SM-83-5 George Kaufman Larry Mote Harvey Rosenblum “The Future of Commercial Banks in the Financial Services Industry,” 1983 SM-83-6 Vefa Tarhan “Bank Reserve Adjustment Process and the Use of Reserve Carryover Provision and the Implications of the Proposed Accounting Regime,” 1983 SM-83-7 John J. Di Clemente “The Inclusion of Thrifts in Bank Merger Analysis,” 1983 SM-84-1 Harvey Rosenblum Christine Pavel “Financial Services in Transition: The Effects of Nonbank Competitors,” 1984 SM-81-4 **SM-81-5 *Limited quantity available. **Out of print. Staff Memoranda (cont'd) SM-84-2 George G. Kaufman “The Securities Activities of Commercial Banks,” 1984 SM-84-3 George G. Kaufman Larry Mote Harvey Rosenblum “Consequences of Deregulation for Commercial Banking” SM-84-4 George G. Kaufman “The Role of Traditional Mortgage Lenders in Future Mortgage Lending: Problems and Prospects” SM-84-5 Robert D. Laurent “The Problems of Monetary Control Under Quasi-Contemporaneous Reserves” SM-85-1 Harvey Rosenblum M. Kathleen O’Brien John J. Di Clemente “On Banks, Nonbanks, and Overlapping Markets: A Reassessment of Commercial Banking as a Line of Commerce” SM-85-2 Thomas G. Fischer William H. Gram George G. Kaufman Larry R. Mote “The Securities Activities of Commercial Banks: A Legal and Economic Analysis” SM-85-3 George G. Kaufman “Implications of Large Bank Problems and Insolvencies for the Banking System and Economic Policy” SM-85-4 Elijah Brewer, III “The Impact of Deregulation on The True Cost of Savings Deposits: Evidence From Illinois and Wisconsin Savings & Loan Association” SM-85-5 Christine Pavel Harvey Rosenblum “Financial Darwinism: Nonbanks— and Banks—Are Surviving” SM-85-6 G. D. Koppenhaver “Variable-Rate Loan Commitments, Deposit Withdrawal Risk, and Anticipatory Hedging” SM-85-7 G. D. Koppenhaver “A Note on Managing Deposit Flows With Cash and Futures Market Decisions” SM-85-8 G. D. Koppenhaver “Regulating Financial Intermediary Use of Futures and Option Contracts: Policies and Issues” SM-85-9 Douglas D. Evanoff “The Impact of Branch Banking on Service Accessibility” SM-86-1 George J. Benston George G. Kaufman “Risks and Failures in Banking: Overview, History, and Evaluation” SM-86-2 David Alan Aschauer “The Equilibrium Approach to Fiscal Policy” *Limited quantity available. **Out of print. 6 Staff Memoranda (cont'd) SM-86-3 George G. Kaufman “Banking Risk in Historical Perspective” SM-86-4 Elijah Brewer III Cheng Few Lee “The Impact of Market, Industry, and Interest Rate Risks on Bank Stock Returns” SM-87-1 Ellen R. Rissman “Wage Growth and Sectoral Shifts: New Evidence on the Stability of the Phillips Curve” SM-87-2 Randall C. Merris “Testing Stock-Adjustment Specifications and Other Restrictions on Money Demand Equations” SM-87-3 George G. Kaufman “The Truth About Bank Runs” SM-87-4 Gary D. Koppenhaver Roger Stover “On The Relationship Between Standby Letters of Credit and Bank Capital” SM-87-5 Gary D. Koppenhaver Cheng F. Lee “Alternative Instruments for Hedging Inflation Risk in the Banking Industry” SM-87-6 Gary D. Koppenhaver “The Effects of Regulation on Bank Participation in the Market” SM-87-7 Vefa Tarhan “Bank Stock Valuation: Does Maturity Gap Matter?” SM-87-8 David Alan Aschauer “Finite Horizons, Intertemporal Substitution and Fiscal Policy” SM-87-9 Douglas D. Evanoff Diana L. Fortier “Reevaluation of the Structure-ConductPerformance Paradigm in Banking” SM-87-10 David Alan Aschauer “Net Private Investment and Public Expenditure in the United States 1953-1984” SM-88-1 George G. Kaufman “Risk and Solvency Regulation of Depository Institutions: Past Policies and Current Options” SM-88-2 David Aschauer “Public Spending and the Return to Capital” SM-88-3 David Aschauer “Is Government Spending Stimulative?” SM-88-4 George G. Kaufman Larry R. Mote “Securities Activities of Commercial Banks: The Current Economic and Legal Environment’’ SM-88-5 Elijah Brewer, III “A Note on the Relationship Between Bank Holding Company Risks and Nonbank Activity” SM-88 -6 G. O. Bierwag George G. Kaufman Cynthia M. Latta “Duration Models: A Taxonomy” G. O. Bierwag George G. Kaufman “Durations of Nondefault-Free Securities” ^Limited quantity available. **Out of print. 7 Staff Memoranda ( cont'd) SM-88-7 David Aschauer “Is Public Expenditure Productive?” SM-88-8 Elijah Brewer, III Thomas H. Mondschean “Commercial Bank Capacity to Pay Interest on Demand Deposits: Evidence from Large Weekly Reporting Banks” SM-88-9 Abhijit V. Banerjee Kenneth N. Kuttner “Imperfect Information and the Permanent Income Hypothesis” SM-88-10 David Aschauer “Does Public Capital Crowd out Private Capital?” SM-88-11 Ellen Rissman “Imports, Trade Policy, and Union Wage Dynamics” Staff Studies—A series of research studies dealing with various economic policy issues on a national level. SS-83-1 **SS-83-2 Harvey Rosenblum Diane Siegel “Competition in Financial Services: the Impact of Nonbank Entry,” 1983 Gillian Garcia “Financial Deregulation: Historical Perspective and Impact of the Garn-St Germain Depository Institutions Act of 1982,” 1983 *Limited quantity available. **Out o f print.
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