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The daily liquidity effect

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Author Info
Daniel L. Thornton

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Abstract

Motivated, on the one hand, by the belief that the Fed controls the short-term rate through open market operations, and on the other, by "the lack of convincing proof that this is what happens," Hamilton (1997) suggested that more convincing evidence of the liquidity effect could be obtained with the use of high-frequency (daily) data. Thornton*s (2001a) detailed analysis of Hamilton*s results and evidence using both Hamilton*s and an alternative methodology indicates a quantitatively unimportant daily liquidity effect. Recently, Carpenter and Demiralp (2006) report "clear evidence" of a daily liquidity effect using a more comprehensive reserve-supply-shock measure than that used by Hamilton. This paper investigates the daily liquidity effect using Carpenter and Demiralp*s new measure.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2006-020.

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Date of creation: 2006
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Handle: RePEc:fip:fedlwp:2006-020

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Related research
Keywords: Interest rates ; Open market operations ; Monetary policy;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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.:
  1. Leonardo Bartolini & Giuseppe Bertola & Alessandro Prati, 2000. "Day-to-day monetary policy and the volatility of the federal funds interest rate," Staff Reports 110, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  2. Daniel L. Thornton, 2001. "Identifying the liquidity effect at the daily frequency," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 59-82. [Downloadable!]
  3. Goodhart, Charles A E, 2000. "Can Central Banking Survive the IT Revolution?," International Finance, Blackwell Publishing, vol. 3(2), pages 189-209, July. [Downloadable!] (restricted)
  4. Friedman, Benjamin M, 1999. "The Future of Monetary Policy: The Central Bank as an Army with Only a Signal Corps?," International Finance, Blackwell Publishing, vol. 2(3), pages 321-38, November. [Downloadable!] (restricted)
  5. Feinman, Joshua N, 1993. "Estimating the Open Market Desk's Daily Reaction Function," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 231-47, May. [Downloadable!] (restricted)
  6. Charles Goodhart, 2000. "Can Central Banking Survive the IT Revolution?," FMG Special Papers sp125, Financial Markets Group. [Downloadable!] (restricted)
  7. Clouse, James A. & Dow, James Jr., 2002. "A computational model of banks' optimal reserve management policy," Journal of Economic Dynamics and Control, Elsevier, vol. 26(11), pages 1787-1814, September. [Downloadable!] (restricted)
  8. Daniel L. Thornton, 2005. "Open market operations and the federal funds rate," Working Papers 2005-063, Federal Reserve Bank of St. Louis. [Downloadable!]
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  9. Daniel L. Thornton, 2005. "When did the FOMC begin targeting the federal funds rate? what the verbatim transcripts tell us," Working Papers 2004-015, Federal Reserve Bank of St. Louis. [Downloadable!]
  10. Friedman, Benjamin M, 2000. "Decoupling at the Margin: The Threat to Monetary Policy from the Electronic Revolution in Banking," International Finance, Blackwell Publishing, vol. 3(2), pages 261-72, July. [Downloadable!] (restricted)
  11. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March. [Downloadable!] (restricted)
  12. 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. [Downloadable!] (restricted)
  13. Benjamin M. Friedman, 2000. "Decoupling at the Margin: The Threat to Monetary Policy from the Electronic Revolution in Banking," NBER Working Papers 7955, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Hamilton, James D, 1997. "Measuring the Liquidity Effect," American Economic Review, American Economic Association, vol. 87(1), pages 80-97, March. [Downloadable!] (restricted)
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  15. Thornton, Daniel L., 2001. "The Federal Reserve's operating procedure, nonborrowed reserves, borrowed reserves and the liquidity effect," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1717-1739, September. [Downloadable!] (restricted)
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  16. Woodford, Michael, 2000. "Monetary Policy in a World without Money," International Finance, Blackwell Publishing, vol. 3(2), pages 229-60, July. [Downloadable!] (restricted)
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  17. John B. Taylor, 2001. "Expectations, open market operations, and changes in the federal funds rate," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 33-58. [Downloadable!]
  18. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May. [Downloadable!] (restricted)
  19. Benjamin M. Friedman, 1999. "The Future of Monetary Policy: The Central Bank as an Army With Only a Signal Corps," NBER Working Papers 7420, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  20. Guthrie, Graeme & Wright, Julian, 2000. "Open mouth operations," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 489-516, October. [Downloadable!] (restricted)
  21. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June. [Downloadable!] (restricted)
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  22. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Piti Disyatat, 2008. "Monetary policy implementation: Misconceptions and their consequences," BIS Working Papers 269, Bank for International Settlements. [Downloadable!]
  2. Marius Jurgilas, 2006. "Interbank Markets under Currency Boards," Working papers 2006-19, University of Connecticut, Department of Economics. [Downloadable!]
  3. Todd Keister & Antoine Martin & James McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 41-56. [Downloadable!]
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