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The identification of liquidity effects in the EMS: Italy 1991–1992

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  • Ignazio Angeloni
  • Alessandro Prati

Abstract

We study the impact of liquidity shocks in Italy in the 1991–1992 period, when the lira belonged to the narrow ERM band with no exchange controls. We conduct our analysis by constructing (not simply assuming) predetermined measures of liquidity supply shocks, taking into account the institutional features of the money market and the reserve requirements' average computation system. We find that the supply of liquidity did significantly affect short-term interest rates; however, in contrast to earlier periods, most of the interest rate variations were attributable to foreign-exchange-related factors, as predicted by the “asymmetric view†of the ERM. Copyright Kluwer Academic Publishers 1996

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 7 (1996)
Issue (Month): 3 (July)
Pages: 275-293

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Handle: RePEc:kap:openec:v:7:y:1996:i:3:p:275-293

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: liquidity effects; reserve requirements; EMS; E43; E52; F41;

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  1. Vittorio Grilli & Nouriel Roubini, 1990. "Financial Integration, Liquidity and Exchange Rates," Cowles Foundation Discussion Papers 939, Cowles Foundation for Research in Economics, Yale University.
  2. David B. Gordon & Eric M. Leeper, 1993. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper 93-5, Federal Reserve Bank of Atlanta.
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  9. Melvin, Michael, 1983. "The Vanishing Liquidity Effect of Money on Interest: Analysis and Implications for Policy," Economic Inquiry, Western Economic Association International, vol. 21(2), pages 188-202, April.
  10. Michael Dotsey & Peter Ireland, 1994. "Liquidity effects and transactions technologies," Proceedings, Federal Reserve Bank of Cleveland, pages 1441-1471.
  11. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc.
  12. Maurice Obstfeld & Robert E. Cumby & John Huizinga, 1983. "Two-Step Two-Stage Least Squares Estimation in Models with Rational Expectations," NBER Technical Working Papers 0011, National Bureau of Economic Research, Inc.
  13. Cooley, Thomas F. & Leroy, Stephen F., 1985. "Atheoretical macroeconometrics: A critique," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 283-308, November.
  14. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity Effects and the Monetary Transmission Mechanism," NBER Working Papers 3974, National Bureau of Economic Research, Inc.
  15. De Grauwe, Paul, 1989. "Is the European Monetary System a DM-Zone?," CEPR Discussion Papers 297, C.E.P.R. Discussion Papers.
  16. Baltensperger, Ernst, 1980. "Alternative approaches to the theory of the banking firm," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 1-37, January.
  17. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
  18. Gallant, A. Ronald & Jorgenson, Dale W., 1979. "Statistical inference for a system of simultaneous, non-linear, implicit equations in the context of instrumental variable estimation," Journal of Econometrics, Elsevier, vol. 11(2-3), pages 275-302.
  19. Cochrane, John H, 1989. "The Return of the Liquidity Effect: A Study of the Short-run Relation between Money Growth and Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(1), pages 75-83, January.
  20. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
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Cited by:
  1. Bluhm, Marcel & Faia, Ester & Krahnen, Jan Pieter, 2014. "Monetary policy implementation in an interbank network: Effects on systemic risk," SAFE Working Paper Series 46, Center of Excellence SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  2. Ulrich Bindseil, 2002. "Central bank forecasts of liquidity factors and the control of short term interest rates," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 55(220), pages 13-37.
  3. Ulrich Bindseil, 2002. "Central bank forecasts of liquidity factors and the control of short term interest rates," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 55(220), pages 13-37.

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