Identifying the liquidity effect: the case of nonborrowed reserves
AbstractDespite the fact that efforts to identify it empirically have largely been futile, the liquidity effect plays a central role in conventional monetary theory and policy. Recently, however, an increasing volume of empirical work [Christiano and Eichenbaum (1992a,b), Christiano, Eichenbaum and Evans (1994a,b) and Strongin (1995)] has supported the existence of a statistically significant and economically important liquidity effect when nonborrowed reserves is used as the indicator of monetary policy. This paper shows that there is an identification problem associated with using nonborrowed reserves. Specifically, the strong negative relationship between nonborrowed reserves and the funds rate can stem from the presence or absence of a liquidity effect. The paper points out how changes in the demand for borrowed reserves can be used to identify whether the relationship between nonborrowed reserves and the funds rate is due to liquidity effect. The evidence presented suggests that the "liquidity effect" that Christiano, Eichenbaum and Evans and others have identified is actually due to the interest sensitivity of the demand for borrowed reserves and the definition linking nonborrowed and borrowed reserves. Consequently, the evidence suggests that the liquidity effect is nil.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1996-002.
Date of creation: 1996
Date of revision:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Christian Gilles & Pamela A. Labadie & Wilbur John Coleman II., 1996.
"A model of the federal funds market,"
Springer, vol. 7(2), pages 337-357.
- Pagan, A.R. & Robertson, J.C., 1994.
"Resolving the Liquidity Effect,"
277, Australian National University - Department of Economics.
- Peristiani, Stavros, 1991. "The Model Structure of Discount Window Borrowing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(1), pages 13-34, February.
- Eric M. Leeper & David B. Gordon, 1991.
"In search of the liquidity effect,"
91-17, Federal Reserve Bank of Atlanta.
- Ben S. Bernanke & Ilian Mihov, 1998.
"Measuring Monetary Policy,"
The Quarterly Journal of Economics,
MIT Press, vol. 113(3), pages 869-902, August.
- Tom Doan, . "RATS programs to replicate Bernanke and Mihov QJE 1998," Statistical Software Components RTZ00013, Boston College Department of Economics.
- Ben S. Bernanke & Ilian Mihov, 1995. "Measuring Monetary Policy," NBER Working Papers 5145, National Bureau of Economic Research, Inc.
- Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series 10, Institute for Advanced Studies.
- Ben S. Bernanke & Ilian Mihov, 1995. "Measuring monetary policy," Working Papers in Applied Economic Theory 95-09, Federal Reserve Bank of San Francisco.
- Daniel L. Thornton, 1988. "The borrowed-reserves operating procedures: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 30-54.
- Bernanke, Ben S & Blinder, Alan S, 1992.
"The Federal Funds Rate and the Channels of Monetary Transmission,"
American Economic Review,
American Economic Association, vol. 82(4), pages 901-21, September.
- Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
- Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
- James A. Clouse, 1994. "Recent developments in discount window policy," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 965-977.
- Cagan, Phillip & Gandolfi, Arthur, 1969. "The Lag in Monetary Policy as Implied by the Time Pattern of Monetary Effects on Interest Rates," American Economic Review, American Economic Association, vol. 59(2), pages 277-84, May.
- Sims, Christopher A. & Zha, Tao, 2006.
"Does Monetary Policy Generate Recessions?,"
Cambridge University Press, vol. 10(02), pages 231-272, April.
- Marvin Goodfriend, 1990.
"Interest rates and the conduct of monetary policy,"
90-06, Federal Reserve Bank of Richmond.
- Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January.
- Reichenstein, William, 1987. "The Impact of Money on Short-term Interest Rates," Economic Inquiry, Western Economic Association International, vol. 25(1), pages 67-82, January.
- Lawrence J. Christiano & Martin Eichenbaum, 1991. "Identification and the Liquidity Effect of a Monetary Policy Shock," NBER Working Papers 3920, National Bureau of Economic Research, Inc.
- Stephen M. Goldfeld & Edward J. Kane, 1966. "The Determinants Of Member‐Bank Borrowing: An Econometric Study," Journal of Finance, American Finance Association, vol. 21(3), pages 499-514, 09.
- Garfinkel, Michelle R & Thornton, Daniel L, 1995. "The Information Content of the Federal Funds Rate: Is It Unique?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 838-47, August.
- Cosimano, Thomas F & Sheehan, Richard G, 1994. "Is the Conventional View of Discount Window Borrowing Consistent with the Behavior of Weekly Reporting Banks?," The Review of Economics and Statistics, MIT Press, vol. 76(4), pages 761-70, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao).
If references are entirely missing, you can add them using this form.