Exchange Rates, Interest Rates, and Money Stock Announcements: A Theoretical Exposition
Author: G. Hardouvelis
Journal of International Money and Finance, December 1985, 4: 443-454.
Abstract:
When the Federal Reserve announces a larger than anticipated weekly
level of the US money stock (Ml) the dollar appreciates and short-term
interest rates increase because of an expected liquidity effect, but longterm
interest rates and particularly long-run forward interest rates
increase because of an expected inflation effect. The two effects are not
mutually exclusive but coexist when market participants are not
completely sure of the Fed’s policy rule, and thus react in a weighted
average manner with weights that reflect subjective probabilities about
different Federal Reserve money growth policies.
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