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The Liquidity Effect: Testing Identification Conditions Under Time-Varying Conditional Volatility

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Author Info

  • Michel Normandin

    (CREFE/UQAM)

  • Louis Phaneuf

    (CREFE/UQAM)

Abstract

In the recent SVAR literature, the liquidity effect has been studied by imposing a variety of identifying restrictions required under the assumption that the SVAR fundamental disturbances are homoscedastic. Using typical SVAR processes, we first show that this assumption is not supported by the data and that the SVAR residuals are not characterized by common conditional scedastic structures. Under time-varying conditional volatility of residuals, we are then able to formally test typical sets of restrictions that have been imposed in previous studies. Our results indicate that to obtain a well characterized liquidity effect, one must measure monetary policy shocks as innovations in the Federal funds rate. This paper is available at ftp://crefe.dse.uqam.ca/pub/cahiers/cah40.ps Additional tables are at ftp://crefe.dse.uqam.ca/pub/cahiers/cah40t.ps The whole WP list is at http://www.er.uqam.ca/nobel/crefe/cahiers.html

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Bibliographic Info

Paper provided by EconWPA in its series Econometrics with number 9607001.

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Length: 7 pages
Date of creation: 03 Jul 1996
Date of revision:
Handle: RePEc:wpa:wuwpem:9607001

Note: 25+7 pages, 2 Postscript files
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Web page: http://128.118.178.162

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References

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  1. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
  2. Ben Bernanke, 1990. "On the Predictive Power of Interest Rates and Interest Rate Spreads," NBER Working Papers 3486, National Bureau of Economic Research, Inc.
  3. 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.
  4. 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.
  5. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
  6. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
  7. 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.).
  8. Engle, Robert F & Susmel, Raul, 1993. "Common Volatility in International Equity Markets," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(2), pages 167-76, April.
  9. Adrian R. Pagan & John C. Robertson, 1995. "Resolving the liquidity effect," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 33-54.
  10. James Dunn, 1973. "A note on a sufficiency condition for uniqueness of a restricted factor matrix," Psychometrika, Springer, vol. 38(1), pages 141-143, March.
  11. 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.
  12. Eichenbaum, Martin, 1992. "'Interpreting the macroeconomic time series facts: The effects of monetary policy' : by Christopher Sims," European Economic Review, Elsevier, vol. 36(5), pages 1001-1011, June.
  13. David B. Gordon & Eric M. Leeper, 1992. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper 92-13, Federal Reserve Bank of Atlanta.
  14. Sentana, Enrique & Fiorentini, Gabriele, 2001. "Identification, estimation and testing of conditionally heteroskedastic factor models," Journal of Econometrics, Elsevier, vol. 102(2), pages 143-164, June.
  15. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, vol. 62(4), pages 901-33, July.
  16. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
  17. McCallum, Bennett T., 1983. "A reconsideration of Sims' evidence concerning monetarism," Economics Letters, Elsevier, vol. 13(2-3), pages 167-171.
  18. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
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Cited by:
  1. Guglielmo Maria Caporale & Andrea Cipollini & Panicos Demetriades, 2000. "Monetary Policy and the Exchange Rate During the Asian Crisis Identification Through Heteroscedasticity," Discussion Papers in Economics 00/11, Department of Economics, University of Leicester, revised Feb 2002.

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