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Testing the liquidity effect with equilibrium interest rate

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  • Liu Zhentao

Abstract

We examine the existence of liquidity effects by using the equilibrium interest rates estimated from the disequilibrium analysis instead of the observed interest rate. The use of equilibrium interest rates allows us to take the growth rate in the money supply as being exogenous and circumvent the identification problem away. Following the traditional AR model and the method proposed by Hamilton (1997), we obtain evidences showing the negative relationship between the equilibrium interest rate and the growth rate in money supply.

Suggested Citation

  • Liu Zhentao, 2008. "Testing the liquidity effect with equilibrium interest rate," Applied Economics, Taylor & Francis Journals, vol. 40(12), pages 1529-1535.
    • Handle: RePEc:taf:applec:v:40:y:2008:i:12:p:1529-1535
    DOI: 10.1080/00036840600820689
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    References listed on IDEAS

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    1. Philip Cagan, 1972. "Introduction to "The Channels of Monetary Effects on Interest Rates"," NBER Chapters, in: The Channels of Monetary Effects on Interest Rates, pages 1-8, National Bureau of Economic Research, Inc.
    2. Ben Fung & Rohit Gupta, "undated". "Searching for the Liquidity Effect in Canada," Staff Working Papers 94-12, Bank of Canada.
    3. Philip Cagan, 1972. "The Channels of Monetary Effects on Interest Rates," NBER Books, National Bureau of Economic Research, Inc, number caga72-1.
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