Reserves Announcements and Interest Rates: Does Monetary Policy Matter?

Abstract

The author provides evidence on the perceived existence of strong liquidity effect. The analysis is based on the response of the term structure of interest rates to the weekly Federal Reserve announcements of bank reserves during the post-October 1979 period. It is shown that unanticipated changes in the mix between borrowed and nonborrowed reservescauseexpected real interest rates to change after the announcement because they provide information about a future change in thesupplyof money. A precise model is developed and tested during subperiods of nonborrowed and borrowed reserves targeting by the Fed.