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Cross-Country Variation in the Liquidity Effect: The Role of Financial Markets

  • William D. Lastrapes
  • W. Douglas McMillin

This paper examines cross-country variation in the liquidity effect - the negative response of interest rates to money supply shocks - focusing on the role of financial factors in explaining this variation. We estimate the liquidity effect for each of 21 countries using VAR models in which money supply shocks are restricted to be neutral in the long-run, then regress the estimated liquidity effect on financial market variables across countries. We find that financial factors play an important role in determining the magnitude of the liquidity effect, and that this evidence is most consistent with generalised versions of limited-participation models. Copyright 2004 Royal Economic Society.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 114 (2004)
Issue (Month): 498 (October)
Pages: 890-915

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Handle: RePEc:ecj:econjl:v:114:y:2004:i:498:p:890-915
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  1. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," International Finance Discussion Papers 462, Board of Governors of the Federal Reserve System (U.S.).
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