number of articles have emerged over the past five years which have examined A the impact of money supply announcements on the market prices of assets. Some studies focus on the effect of monetary innovations on foreign exchange prices while others consider their impact on market interest rates. ' , on the other hand, analyze the reaction of stock prices to the Fed's announcement of M1. Finally Frenkel and Hardouvelis (1983), have considered the extent to which foreign exchange futures prices adjust given the weekly unanticipated changes in M1.
The literature presents a number of different hypotheses regarding the impact of monetary announcements on financial asset prices. Firstly, market prices may adjust at each weekly money supply announcement due to a direct liquidity effect. Increases in the money supply create conditions of excess supply in the money market and corresponding conditions of excess demand in all other markets. To the extent that financial assets like government securities, stocks, even foreign currency are considered substitutes for money, the prices on these financial instruments should adjust upward. Cornell (1983), and others have noted, however, that the actual change in M 1 occurs, on average, nine days before the weekly announcement. Therefore, asset prices should adjust before rather than synchronously with the weekly M1 announcement. To test for the significance of the so called Keynesian Liquidity effect, one would have to examine the behavior of asset prices relative to actual changes in liquidity (Ml) rather than those changes announced by the Fed.
The author would like to acknowledge a number of helpful suggestions by the referees of an earlier version of this article.
' and Hardouvelis (1984) examine the impact of monetary announcements on foreign exchange rates. Studies by Urich and Wachtel (1981), Grossman (1981) and Cornell (1979Cornell ( , 1983) ) consider the reaction of market interest rates to these money supply innovations.