The Journal of Economic History

Articles

Interest Rate Uncertainty and the Founding of the Federal Reserve

Tony Caporalea1 and Barbara McKiernana2

a1 Associate Professor, Department of Economics, Ohio University, Athens, OH 45701. E-mail: Caporale@ouvaxa.cats.ohiou.edu.

a2 Assistant Professor, Department of Economics, Ohio University, Athens, OH 45701. E-mail: Caporale@ouvaxa.cats.ohiou.edu.

Abstract

This article examines the impact of what is undoubtedly the most important monetary regime change in U.S. history: the founding of the Federal Reserve System. We find, using a (G)ARCH model, a significant reduction in interest rate uncertainty following the founding of the Fed. Additionally, we show that the passage of the Aldrich-Vreeland Act in 1908, another significant change in policy, also led to a reduction in interest rate uncertainty. These results are robust to alternative interest rate models, as well as to incorporating the impact of other events important to financial markets in our sample.

Metrics