Measuring Market Responses to Error-Ridden Government Announcements

This article analyzes how asset prices respond to government announcements that are subject to error. In cases where government forecast errors are correlated with available market information, market agents will not respond to the government's preliminary announcements per se. Instead, they will respond to the new information on the final value that is conveyed by the government announcement. The authors show that such systematic government errors can cause biases in deriving the structural response of asset prices to government announcements. They illustrate the problem and a proposed solution using USDA soybean forecasts and the Federal Reserve's weekly money supply announcement as examples.