THE INFORMATION-CONTENT OF GERMAN DISCOUNT RATE CHANGES

Discount rate changes always receive considerable attention in financi al markets. Two hypotheses compete to explain financial market reactio ns: the direct 'borrowing cost effect' and the announcement effect. Fo r the Bundesbank's discount rate changes after 1979 we find that marke t reactions cannot be attributed to a direct borrowing cost effect but exclusively to announcement effects. The empirical results indicate t hat interest rates react to changes in the discount rate to the extent that they are unanticipated. In contrast, the response to anticipated changes in the discount rate is small and insignificant. We proxy mar ket anticipations by a multinomial legit-model combined with a dummy v ariable capturing non-quantifiable factors reported by the financial p ress. Moreover, we show that the response of interest rates declines a long the term structure and with the switch to greater emphasis on rep urchase operations in early 1985. (C) 1998 Elsevier Science B.V. All r ights reserved.