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The Liquidity Premium in the Money Market: A Comparison of the German Mark Period and the Euro Area

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  • Alain Durré

Abstract

This paper investigates to what extent the expectations hypothesis of the term structure (EHTS) of interest rates receives some support since the launch of the European single currency. Empirical evidence shows that in general this theory applies to most European countries, and to Germany in particular. The objective of this paper thus is twofold. First, the EHTS for the German money market and for a larger sample including the German mark period and the euro money market is tested in order to check whether the results for the former are affected by the new financial environment since January 1999. Second, the implications of the results for the monetary policy assessment are discussed. We estimate cointegrating vector autoregressive models in order to quantify the level of the liquidity premium. The results suggest that financial markets do not consider the monetary policy of the European Central Bank simply as the one prevailing during the German period. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2006.

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Bibliographic Info

Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 7 (2006)
Issue (Month): (05)
Pages: 163-187

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Handle: RePEc:bla:germec:v:7:y:2006:i::p:163-187

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  13. Héraclès M. POLEMARCHAKIS & Luigi VENTURA, 2001. "The Relevance of Extrinsic Uncertainty," Annales d'Economie et de Statistique, ENSAE, issue 62, pages 175-191.
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  16. Thornton, Daniel L., 2005. "Tests of the expectations hypothesis: Resolving the anomalies when the short-term rate is the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2541-2556, October.
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Cited by:
  1. Dette, Holger & Weißbach, Rafael, 2006. "A Bootstrap Test for the Comparison of Nonlinear Time Series - with Application to Interest Rate Modelling," Technical Reports 2006,30, Technische Universität Dortmund, Sonderforschungsbereich 475: Komplexitätsreduktion in multivariaten Datenstrukturen.

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