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Perfect substitution in the models of the CD market

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  • Arthur J. Rolnick

Abstract

As the CD market has become an important source of bank funds, it has also become an important market for policymakers to understand. But so far model builders have not recognized the significance of assuming that new and old CDs are perfect substitutes. Therefore, they have misused the assumption, discarded relevant data, and ignored evidence inconsistent with perfect substitution. This study shows that models of the CD market should not treat new and old issues as perfect substitutes and that they should not drop observations when market rates are above the Regulation Q ceiling.

Suggested Citation

  • Arthur J. Rolnick, 1979. "Perfect substitution in the models of the CD market," Staff Report 41, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:41
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    References listed on IDEAS

    as
    1. Edward M. Gramlich & John H. Kalchbrenner, 1970. "A constrained estimation approach to the demand for liquid assets," Special Studies Papers 3, Board of Governors of the Federal Reserve System (U.S.).
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    3. M. Parkin, 1970. "Discount House Portfolio and Debt Selection," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 37(4), pages 469-497.
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