The effects of monetary policy announcements on long-term interest rates

Whether monetary policy announcements affect interest rates is an important and an in the recent literature often debated topic. It seems generally accepted that an increase in the federal funds target rate affects the market interest rate immediately. However, no research has ever proven this theory to be correct. This research tries to identify this relation by showing that a long-term relation exists between the long-term interest rate and two parameters, namely a measure of ‘normal’ news and a measure of monetary policy news. The equation is estimated by using an OLS regression and the Error Correction Model. The Error Correction Model shows more significant results than the regression does, in which several variables are not significant. The conclusion is that the interest rate reacts significantly different to a monetary policy announcement than it does to other news announcement. The sign of this coefficient, though, remains to be doubtful.