Economics Letters 20 (1986) 377-381 North-Holland 377 MONETARY ANNOUNCEMENTS AND STOCK PRICES IN ISRAEL Leonardo LEIDERMAN * Tel-Awe Unicwrslty, Tel-AC 69978, Israel Edward K. OFFENBACHER * Bank of Israel, Jerusalem 91007. Israel Received 2 December 1985 Responses of stock prices to monetary announcements in Israel are examined. Only the unexpected part of monetary injection announcements are found to have a significant impact an stock prices. Unlike findings for the U.S., this impact is positive. zyxwvutsrqp 1. Introduction Recent empirical research has produced a number of interesting findings on the impact of weekly money supply announcements by the Federal Reserve on stock prices in the U.S. ’ Specifically, the evidence indicates that only the unexpected change in the announced money supply has a significant effect on stock prices and that this effect is completed within the trading day following the announcement. The consensus finding is that an unexpected increase in the announced money supply has a negative effect on stock prices. While a number of explanations and models have been proposed in the literature, none of them has fully accounted for the observed findings. Two of these explanations have been widely advocated, and they emphasize specific channels whereby the arrival of new monetary information alters agents’ expectations of future real interest rates and inflation. One interpretation is that an unexpectedly high money supply figure leads to higher expected real interest rates and thus to lower stock prices. The second interpretation asserts that an unexpected increase in the announced money supply raises agents’ expectations of inflation, which in turn raise nominal interest rates and thus depress stock prices. 2 While methods for testing these competing hypotheses are being developed, it would be useful to gain information on the robustness of the observed link between money announcements and stock prices in settings other than the U.S. economy. Accordingly, the purpose of this paper is to examine empirically the response of stock prices to the release of monetary announcements in Israel. We find, in fact, that a significant link exists between the unexpected component of money supply announce- ments and stock prices but the direction of effect is positive. The motivation for examining this issue * We thank Mindi Cohen for excellent research assistance and the spokesman of the Bank of Israel, Amnon Yaacobi, and his staff for assistance in accessing the announcement data. ’ See, for example, Berkman (1978), Cornell (1983), Pearce and Roley (1983,1985), and Hardouvelis (1985). ’ Cornell (1983) reviews these and other interpretations. 0165.1765/86/$3.50 <r> 1986, Elsevier Science Publishers B.V. (North-Holland)