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Efficient Market Responses to Error- Ridden Money Supply Announcements

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  • Orazem, Peter
  • Falk, Barry
Abstract
This study introduces a model of optimal market response to announced estimates of changes in economic aggregates when the estimates are known to be subject to error. We show that under fairly general conditions, rational economic agents will not take the announcements at face value, but will attempt to extract their own perception of the true change conditional on the announcement. Ignoring this signal extraction process can lead to incorrect conclusions regarding the behavioral response of asset prices to money supply shocks. The model is shown to be consistent with the data on the response of interest rates to money supply announcements.

Suggested Citation

  • Orazem, Peter & Falk, Barry, 1984. "Efficient Market Responses to Error- Ridden Money Supply Announcements," ISU General Staff Papers 198407010700001141, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:198407010700001141
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