The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve.

The founding of the Federal Reserve System in 1914 led to a substantial change in the behavior of nominal interest rates. The authors examine the timing of this change and the speed with which it was effected. They then use data on the term structure of interest rates to determine how expectations responded. Their results indicate that the change in policy regime was rapid and that individuals quickly understood the new environment they were facing. Copyright 1987 by American Economic Association.