Discount rate changes and their effects on market returns during recent U.S. recessions

This paper explores the market response to the discount rate changes during the recent U.S. recessions and finds that the response of market rates to discount rate changes varied during the recent two recessions. The different... [ view full abstract ]

This paper explores the market response to the discount rate changes during the recent U.S. recessions and finds that the response of market rates to discount rate changes varied during the recent two recessions. The different responses of market rates to discount rate changes are due to the various economic and policy circumstances that the market was facing. This conclusion is consistent with Thornton's finding (1998). Thornton (1998) found that the different market responses to the discount rate changes mainly depend on the information content that people believed contained in the announcements of the discount rate changes. It's interesting to point out that during the "Great Recession", market rates were not sensitive to discount rate changes. The underlying reason was the discount rates were above the federal funds rates during the "Great Recession". In other words, the discount window borrowing has lost its function to provide adequate funds to the economy during the recession.