Center for Risk Management Research

On April 18, 2001 US Federal Reserve Open Market Committee (FOMC) surprised financial markets by lowering the Federal Funds Target rate 1/2% between regularly scheduled FOMC meeing dates. Securities markets in the US and Australia responded. The US 30-Euro$ rate fell by 1/2%.and US and Australian five year bond yields fell by about 13 basis points. Equity returnsincreased by 3% in the US and 11/2% in Australia. This paper is the first to examine international monetary policy surprise spillovers and to estimate the response of security prices to unobservable monetary and nonmonetary surprises. Our estimates of the impact of domestic monetary policy surprises on domestic yields and returns are similar to other studies. The following results are new. US monetary policy surprises spill over and affect Australian yields and equity returns. Australian monetary surprises do not spill over to the US. Nonmonetary surprises are more important in explaining the movements in longer maturity yields and returns than monetary policy surprises.