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Cross-Country Variation in the Liquidity Effect: The Role of Financial Markets

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  • William D. Lastrapes
  • W. Douglas McMillin

Abstract

This paper examines cross-country variation in the liquidity effect - the negative response of interest rates to money supply shocks - focusing on the role of financial factors in explaining this variation. We estimate the liquidity effect for each of 21 countries using VAR models in which money supply shocks are restricted to be neutral in the long-run, then regress the estimated liquidity effect on financial market variables across countries. We find that financial factors play an important role in determining the magnitude of the liquidity effect, and that this evidence is most consistent with generalised versions of limited-participation models. Copyright 2004 Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 114 (2004)
Issue (Month): 498 (October)
Pages: 890-915

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Handle: RePEc:ecj:econjl:v:114:y:2004:i:498:p:890-915

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Citations

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Cited by:
  1. Stefan Krause & Felix Rioja, 2006. "Financial Development and Monetary Policy Efficiency," Emory Economics 0613, Department of Economics, Emory University (Atlanta).
  2. Antonis Michis, 2011. "Multiscale Analysis of the Liquidity Effect," Working Papers 2011-5, Central Bank of Cyprus.
  3. Chadha, J.S. & Corrado, L. & Sun, Q., 2008. "Money, Prices and Liquidity Effects: Separating Demand from Supply," Cambridge Working Papers in Economics 0855, Faculty of Economics, University of Cambridge.
  4. Johann Scharler, 2007. "The Liquidity Effect in Bank-Based and Market-Based Financial Systems," Economics working papers 2007-18, Department of Economics, Johannes Kepler University Linz, Austria.
  5. Chadha, Jagjit S. & Corrado, Luisa & Sun, Qi, 2010. "Money and liquidity effects: Separating demand from supply," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1732-1747, September.
  6. Piti Disyatat, 2008. "Monetary policy implementation: Misconceptions and their consequences," BIS Working Papers 269, Bank for International Settlements.
  7. Roberto ESPOSTI, 2007. "On the Decline of Agriculture. Evidence from Italian Regions in the Post-WWII Period," Working Papers 300, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  8. Söderberg, Jonas, 2008. "Do Macroeconomic Variables Forecast Changes in Liquidity? An Out-of-sample Study on the Order-driven Stock Markets in Scandinavia," CAFO Working Papers 2009:10, Centre for Labour Market Policy Research (CAFO), School of Business and Economics, Linnaeus University.
  9. Maria Ibanez & Anthony Pennington-Cross, 2013. "Commercial Property Rent Dynamics in U.S. Metropolitan Areas: An Examination of Office, Industrial, Flex and Retail Space," The Journal of Real Estate Finance and Economics, Springer, vol. 46(2), pages 232-259, February.

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