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The daily and policy-relevant liquidity effects

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  • Thornton, Daniel L.

Abstract

The phrase “liquidity effect” was introduced by Milton Friedman (1969) to describe the first of three effects on interest rates caused by an exogenous change in the money supply. The lack of empirical support for the liquidity effect using monthly and quarterly data using various monetary and reserve aggregates led Hamilton (1997) to suggest that more convincing evidence of the liquidity effect could be obtained using daily data – the daily liquidity effect. This paper investigates the implications of the daily liquidity effect for Friedman’s liquidity effect using a comprehensive model of the Fed’s daily operating procedure. The evidence indicates that it is no easier to find convincing evidence of a Friedman’s liquidity effect using daily data than it has been using lower frequency data. JEL Classification: E40, E52

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0984.

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Date of creation: Dec 2008
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Handle: RePEc:ecb:ecbwps:20080984

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Keywords: federal funds rate; FOMC; liquidity effect; monetary policy; operating procedure;

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Cited by:
  1. Daniel L. Thornton, 2008. "Monetary policy: why money matters and interest rates don't," Working Papers 2008-011, Federal Reserve Bank of St. Louis.
  2. Signe Krogstrup & Samuel Reynard & Barbara Sutter, 2012. "Liquidity Effects of Quantitative Easing on Long-Term Interest Rates," Working Papers 2012-02, Swiss National Bank.

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