The Reaction of Interest Rates to Unanticipated Federal Reserve Actions and Statements: Implications for the Money Announcement Controversy.

This paper examines the reaction of long- and short-term interest rates to monetary polic y surprises that influenced market expectations of the future behavio r of the Federal Funds rate in the period after October 1979. The aut hors find that the relative reaction of long- and short-term rates t o policy surprises is similar to the relative reaction of these rates to money announcements. Consequently, they conclude that the large r eaction of long-term interest rates to money announcements in the per iod after October 1979 is consistent with the "policy anticipations hypothesis," which views this reaction as a movement in real intere st rates. Copyright 1987 by Oxford University Press.