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The Effect of Money Shocks on Interest Rates in the Presence of Conditional Heteroskedasticity

  • Grier, Kevin B
  • Perry, Mark J

Most current empirical work finds no evidence that money shocks lower interest rates. The authors show that these nonresults are mainly due to a failure to model the conditional heteroskedasticity of interest rates. Autoregressive conditional heteroskedasiticity (ARCH) models find a significant liquidity effect where ordinary least squares (OLS) models do not. The existence of a liquidity effect is found using different models and sample periods when ARCH models are used in estimation but never when OLS is employed. Copyright 1993 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 48 (1993)
Issue (Month): 4 (September)
Pages: 1445-55

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Handle: RePEc:bla:jfinan:v:48:y:1993:i:4:p:1445-55
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