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The Liquidity Effect in the Federal Funds Market: Evidence at the Monthly Frequency

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  • SETH CARPENTER
  • SELVA DEMIRALP

Abstract

In this paper, we argue that much of the research into the link between money and interest rates suffers from misspecification. The measure of money and the measure of interest rates are not always well matched. In examining the transmission of monetary policy, we show that using an appropriate measure of money, Federal Reserve balances, and the appropriate interest rate, the federal funds rate, a clear liquidity effect exists. Furthermore, we explain how a lack of a clear institutional understanding may have contributed to the finding of a "liquidity puzzle" in the past. Copyright 2008 The Ohio State University.

Suggested Citation

  • Seth Carpenter & Selva Demiralp, 2008. "The Liquidity Effect in the Federal Funds Market: Evidence at the Monthly Frequency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 1-24, February.
  • Handle: RePEc:mcb:jmoncb:v:40:y:2008:i:1:p:1-24
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    Citations

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    Cited by:

    1. M. Berument & Selahattin Togay & Afsin Sahin, 2011. "Identifying the Liquidity Effects of Monetary Policy Shocks for a Small Open Economy: Turkey," Open Economies Review, Springer, vol. 22(4), pages 649-667, September.
    2. Friedman, Benjamin M. & Kuttner, Kenneth N., 2010. "Implementation of Monetary Policy: How Do Central Banks Set Interest Rates?," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 24, pages 1345-1438 Elsevier.
    3. repec:eee:jcecon:v:46:y:2018:i:1:p:1-19 is not listed on IDEAS
    4. Nautz, Dieter & Schmidt, Sandra, 2009. "Monetary policy implementation and the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1274-1284, July.
    5. Seda Demiralp & Selva Demiralp & Inci Gumus, 2015. "The State of Property Development in Turkey: Facts and Comparisons," Koç University-TUSIAD Economic Research Forum Working Papers 1503, Koc University-TUSIAD Economic Research Forum.
    6. Piti Disyatat, 2008. "Monetary policy implementation: Misconceptions and their consequences," BIS Working Papers 269, Bank for International Settlements.
    7. Jaime R. Marquez & Ari Morse & Bernd Schlusche, 2012. "The Federal Reserve's balance sheet and overnight interest rates," Finance and Economics Discussion Series 2012-66, Board of Governors of the Federal Reserve System (U.S.).
    8. Carpenter, Seth & Demiralp, Selva, 2012. "Money, reserves, and the transmission of monetary policy: Does the money multiplier exist?," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 59-75.
    9. Abbassi, Puriya & Nautz, Dieter, 2012. "Monetary transmission right from the start: On the information content of the Eurosystem's main refinancing operations," The North American Journal of Economics and Finance, Elsevier, vol. 23(1), pages 54-69.
    10. Eisenschmidt, Jens & Carpenter, Seth & Demiralp, Selva, 2013. "The effectiveness of the non-standard policy measures during the financial crises: the experiences of the federal reserve and the European Central Bank," Working Paper Series 1562, European Central Bank.
    11. Daniel L. Thornton, 2012. "The Federal Reserve’s response to the financial crisis: what it did and what it should have done," Working Papers 2012-050, Federal Reserve Bank of St. Louis.
    12. Nautz, Dieter & Scheithauer, Jan, 2011. "Monetary policy implementation and overnight rate persistence," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1375-1386.
    13. Tarron Khemraj & Christian R. Proaño, 2011. "Excess Bank Reserves and Monetary Policy with a Lower-Bound Lending Rate September 2011," Working Papers 1104, New School for Social Research, Department of Economics.
    14. Rokon Bhuiyan, 2012. "Monetary transmission mechanisms in a small open economy: a Bayesian structural VAR approach," Canadian Journal of Economics, Canadian Economics Association, vol. 45(3), pages 1037-1061, August.
    15. Joseph E. Gagnon & Brian Sack, 2014. "Monetary Policy with Abundant Liquidity: A New Operating Framework for the Fed," Policy Briefs PB14-4, Peterson Institute for International Economics.
    16. Judson, Ruth A. & Klee, Elizabeth, 2010. "Whither the liquidity effect: The impact of Federal Reserve open market operations in recent years," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 713-731, September.
    17. Marquez, Jaime & Morse, Ari & Schlusche, Bernd, 2013. "The Federal Reserve’s balance sheet and overnight interest rates: Empirical modeling of exit strategies," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5300-5315.
    18. Carpenter, Seth & Demiralp, Selva, 2006. "The Liquidity Effect in the Federal Funds Market: Evidence from Daily Open Market Operations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 901-920, June.
    19. Hearn, Bruce, 2013. "Size and liquidity effects in Nigeria: an industrial sector study," MPRA Paper 47975, University Library of Munich, Germany.
    20. Ruth Judson & Elizabeth C. Klee, 2009. "Whither the liquidity effect: the impact of Federal Reserve Open Market Operations in recent years," Finance and Economics Discussion Series 2009-25, Board of Governors of the Federal Reserve System (U.S.).
    21. Aysan, Ahmet F. & Disli, Mustafa & Duygun, Meryem & Ozturk, Huseyin, 2018. "Religiosity versus rationality: Depositor behavior in Islamic and conventional banks," Journal of Comparative Economics, Elsevier, vol. 46(1), pages 1-19.
    22. Kopchak, Seth J., 2011. "The liquidity effect for open market operations," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3292-3299.
    23. Peter Docherty, 2012. "Keynes’s General Theory, the Quantity Theory of Money and Monetary Policy," Chapters,in: Keynes’s General Theory, chapter 6 Edward Elgar Publishing.

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