The Liquidity Effect: Testing Identification Conditions Under Time-Varying Conditional Volatility
AbstractIn the recent SVAR literature, the liquidity effect has been studied by imposing a variety of identifying restrictions required under the assumption that the SVAR fundamental disturbances are homoscedastic. Using typical SVAR processes, we first show that this assumption is not supported by the data and that the SVAR residuals are not characterized by common conditional scedastic structures. Under time-varying conditional volatility of residuals, we are then able to formally test typical sets of restrictions that have been imposed in previous studies. Our results indicate that to obtain a well characterized liquidity effect, one must measure monetary policy shocks as innovations in the Federal funds rate.
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Bibliographic InfoPaper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 40.
Length: 25 pages
Date of creation: May 1996
Date of revision:
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conditional heteroskedasticity; structural vector autoregressive process; recursive system; simultaneous system; short-run elasticities; dynamic responses;
Other versions of this item:
- Michel Normandin & Louis Phaneuf, 1996. "The Liquidity Effect: Testing Identification Conditions Under Time-Varying Conditional Volatility," Econometrics 9607001, EconWPA.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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