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Multiscale Analysis of the Liquidity Effect in the UK Economy

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  • Antonis Michis

Abstract

This study examines the existence of a liquidity effect in the UK economy over different time-scales. This analysis draws from the liquidity preference framework, an approach to interest rate determination, and uses wavelet multiscale analysis in the context of a standardised regression model. The modelling framework is similar to the one proposed by Cochrane ( 1989 ), however, instead of using a band-pass filter the model’s variables are analyzed with a wavelet multiresolution analysis which enables a more accurate estimation of the liquidity effect. The results suggest that, in short-term cycles, interest rates are influenced primarily by changes in the money supply (i.e., the liquidity effect). In medium- and long-term cycles, the liquidity effect becomes less important and interest rates are found to be more sensitive to income and price effects. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Antonis Michis, 2015. "Multiscale Analysis of the Liquidity Effect in the UK Economy," Computational Economics, Springer;Society for Computational Economics, vol. 45(4), pages 615-633, April.
    • Handle: RePEc:kap:compec:v:45:y:2015:i:4:p:615-633
    DOI: 10.1007/s10614-014-9429-8
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    Cited by:

    1. Fratianni, Michele & Gallegati, Marco & Giri, Federico, 2022. "The medium-run Phillips curve: A time–frequency investigation for the UK," Journal of Macroeconomics, Elsevier, vol. 73(C).
    2. Snezana Eminidou & Marios Zachariadis & Elena Andreou, 2020. "Inflation Expectations and Monetary Policy Surprises," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(1), pages 306-339, January.
    3. Olivier Habimana, 2019. "Wavelet Multiresolution Analysis of the Liquidity Effect and Monetary Neutrality," Computational Economics, Springer;Society for Computational Economics, vol. 53(1), pages 85-110, January.
    4. Antonis A. Michis, 2021. "Wavelet Multidimensional Scaling Analysis of European Economic Sentiment Indicators," Journal of Classification, Springer;The Classification Society, vol. 38(3), pages 443-480, October.

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    More about this item

    Keywords

    Interest rates; Money supply; Liquidity effect ; Wavelets; E43; E51; C65;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools

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