The Announcement Effect: Evidence from Open Market Desk Data

The textbook view of the monetary transmissionmechanism rests on the central bank’s ability tomanipulate the overnight interest rate by controlling thereserve supply, followed by a rational-expectations mechanismthat ensures that movements in the overnight rate reverberateinto longer maturity rates. However, while few dispute the factthat the central bank controls the overnight rate effectively, thenotion that it does so via a liquidity effect and the nature ofterm structure relationships needs to be reexamined.