The Relationship Between U.S. Federal Reserve Discount Rate Changes and Fluctuations in Interest and Exchange Rates

This study examines the relationship between U.S. monetary policy changes and financial market reactions; in particular, the fluctuations in interest rates and exchange rates for the U.S., Britain, Canada, France, Germany, and Japan are related to changes in the U.S. Federal Reserve discount rate for the period 1980–1991. Consistent with previous research, the results indicate a significant relationship between U.S. interest rates and changes in the discount rate throughout the test period. Further, the relationship between non‐U.S. interest rates and the U.S. discount rate is minimal during the first half of the test period but strong in the second half of the period. As expected, statistically significant results were not found with respect to exchange rates. These results suggest an increase both in financial market integration and in the U.S. Federal Reserve's role as an international financial policymaker.