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Working Papers

June 1986, No. 86-2

The Reaction of Interest Rates to Unanticipated Federal Reserve Actions and Statements, 1977-1984: Implications for the Money Announcement Controversy

Timothy Q. Cook and Thomas K. Hahn

Considerable attention has been devoted to the reaction of interest rates, foreign exchange rates, and stock prices to unanticipated money growth revealed by the weekly M1 money stock announcement. Numerous articles have attempted to explain why nominal interest rates rise following the announcement of an M1 figure higher than expected and fall when an M1 figure is lower than expected. The major controversy in this literature is whether the observed reaction of interest rates reflects changes in the inflation expectations component or in the real rate component of the nominal rate.

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