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Multiscale Analysis of the Liquidity Effect

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  • Antonis Michis

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    (Central Bank of Cyprus)

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    Abstract

    This study examines the existence of a liquidity effect in Mexico over different time scales. This analysis draws from the liquidity preference framework, an approach to interest rate determination, and uses wavelet multiscale analysis in the context of a standardised regression model. The results suggest that, in short-term cycles, interest rates are influenced primarily by changes in the money supply (i.e., the liquidity effect). In medium- and long-term cycles, the liquidity effect becomes less important and interest rates are found to be more sensitive to income and price effects.

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    File URL: http://www.centralbank.gov.cy/media/pdf/NPWPE_No5_102011.pdf
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    Bibliographic Info

    Paper provided by Central Bank of Cyprus in its series Working Papers with number 2011-5.

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    Length: 18 pages
    Date of creation: Oct 2011
    Date of revision:
    Handle: RePEc:cyb:wpaper:2011-5

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    Web page: http://www.centralbank.gov.cy/nqcontent.cfm?a_id=1
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    Related research

    Keywords: Interest rates; liquidity effect; money supply; wavelets.;

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    References

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    1. William Barnett & Logan Kelly & John Keating, 2010. "Rethinking the Liquidity Puzzle: Application of a New Measure of the Economic Money Stock," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201002, University of Kansas, Department of Economics, revised Apr 2010.
    2. Thomas Urich & Paul Wachtel, 1984. "The Effects of Inflation and Money Supply Announcements on Interest Rates," NBER Working Papers 1313, National Bureau of Economic Research, Inc.
    3. Urich, Thomas J & Wachtel, Paul, 1984. " The Effects of Inflation and Money Supply Announcements on Interest Rates," Journal of Finance, American Finance Association, vol. 39(4), pages 1177-88, September.
    4. Serletis, Apostolos & Chwee, Victor, 1997. "Resolving The Liquidity Puzzle," Macroeconomic Dynamics, Cambridge University Press, vol. 1(04), pages 720-739, December.
    5. A. R. Pagan & J. C. Robertson, 1998. "Structural Models Of The Liquidity Effect," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 202-217, May.
    6. Thornton, Daniel L., 2004. "The Fed and short-term rates: Is it open market operations, open mouth operations or interest rate smoothing?," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 475-498, March.
    7. Nouriel Roubini & Vittorio Grilli, 1995. "Liquidity Models in Open Economies: Theory and Empirical Evidence," NBER Working Papers 5313, National Bureau of Economic Research, Inc.
    8. Kim, Soyoung, 1999. "Do monetary policy shocks matter in the G-7 countries? Using common identifying assumptions about monetary policy across countries," Journal of International Economics, Elsevier, vol. 48(2), pages 387-412, August.
    9. Luís Francisco Aguiar-Conraria & Maria Joana Soares & Nuno Azevedo, 2007. "Using Wavelets to decompose time-frequency economic relations," NIPE Working Papers 17/2007, NIPE - Universidade do Minho.
    10. David O. Cushman & Tao Zha, 1995. "Identifying monetary policy in a small open economy under flexible exchange rates," Working Paper 95-7, Federal Reserve Bank of Atlanta.
    11. James D. Hamilton, 1996. "Measuring the liquidity effect," Working Papers in Applied Economic Theory 96-06, Federal Reserve Bank of San Francisco.
    12. Halabi, Claudia E. & Lastrapes, William D., 2003. "Estimating the liquidity effect in post-reform Chile: do inflationary expectations matter?," Journal of International Money and Finance, Elsevier, vol. 22(6), pages 813-833, November.
    13. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
    14. Frederic S. Mishkin, 1981. "Monetary Policy and Short-Term Interest Rates: An Efficient Markets-Rational Expectations Approach," NBER Working Papers 0693, National Bureau of Economic Research, Inc.
    15. Gencay, Ramazan & Selcuk, Faruk & Whitcher, Brandon, 2005. "Multiscale systematic risk," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 55-70, February.
    16. Fung, Ben Siu-cheong & Kasumovich, Marcel, 1998. "Monetary shocks in the G-6 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 575-592, October.
    17. Eric M. Leeper & David B. Gordon, 1991. "In search of the liquidity effect," International Finance Discussion Papers 403, Board of Governors of the Federal Reserve System (U.S.).
    18. Kopchak, Seth J., 2011. "The liquidity effect for open market operations," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3292-3299.
    19. Boyd, Roy & Caporale, Tony, 1997. "Is there a liquidity effect? An investigation using the Kalman filter," Journal of Policy Modeling, Elsevier, vol. 19(6), pages 627-634, December.
    20. William D. Lastrapes & W. Douglas McMillin, 2004. "Cross-Country Variation in the Liquidity Effect: The Role of Financial Markets," Economic Journal, Royal Economic Society, vol. 114(498), pages 890-915, October.
    21. Lastrapes, W. D., 1998. "International evidence on equity prices, interest rates and money," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 377-406, June.
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