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August/September 1985, 
Vol. 67, No. 7
Posted 1985-08-01

Weekly Money Announcements: New Information and Its Effects

by Richard G. Sheehan

Richard G. Sheehan presents three alternative hypotheses about why financial markets react to this announcement. Two of the hypotheses, the expected liquidity effect and the inflation premium effect, focus on expected changes in the money supply. The third hypotheses, in contrast, concerns the expected changes in money demand. These three hypotheses are generally assumed to be competing explanations of why money announcements have an impact on financial markets. Sheehan demonstrates that, in fact, the three effects may be substitutes or complements. Only the expected liquidity effect by itself is consistent with till the empirical evidence. It is also possible, however, that all three effects have been present.