Rational expectations, money announcements, and the bond market
Larson, Donald F.
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Sargent and Wallace have argued that the natural rate hypothesis combined with rational expectations eradicates the standard effects of monetary policy, unless the central monetary authority holds an information advantage over the general public. In defining rational expectations, John Muth wrote that "public predictions" or announcements do not affect markets since no new information is provided. This paper examines the question of whether money supply announcements provide new information to the bond market, suggesting a possible information advantage on the part of the Federal Reserve Board. Methodology originally used in connection with "causality" testing is utilized after comparing two different forms of the test. Evidence suggesting that money announcements do provide new information leads to questions concerning the time structure of the advantage, which are then tested.
- Masters Theses