The impact of discount rate changes on market interest rates: Evidence from three European countries and Japan

This paper examines the impact of official discount rate (ODR) changes on market interest rates of four countries (Germany, France, Japan and the UK) during the period from 1980 through 1997. The overall results indicate that short-term rates are more responsive than long-term rates for all countries. The magnitude of the changes is country specific. Market rate responses are lower for Germany and Japan, which have fewer changes in ODR. These results are consistent with expectations that there is less uncertainty under such regimes. Consistent with the pace of regulatory reforms, the results of ODR changes are strongest in UK and weakest in Japan. When monetary policy is changed or reversed, interest rate responses are shown to be larger for countries with frequent changes in discount rates.