Identifying the liquidity effect: the case of nonborrowed reserves
Despite the fact that efforts to identify it empirically have largely been futile, the liquidity effect plays a central role in conventional monetary theory and policy. Recently, however, an increasing volume of empirical work [Christiano and Eichenbaum (1992a,b), Christiano, Eichenbaum and Evans (1994a,b) and Strongin (1995)] has supported the existence of a statistically significant and economically important liquidity effect when nonborrowed reserves is used as the indicator of monetary policy. This paper shows that there is an identification problem associated with using nonborrowed reserves. Specifically, the strong negative relationship between nonborrowed reserves and the funds rate can stem from the presence or absence of a liquidity effect. The paper points out how changes in the demand for borrowed reserves can be used to identify whether the relationship between nonborrowed reserves and the funds rate is due to liquidity effect. The evidence presented suggests that the "liquidity effect" that Christiano, Eichenbaum and Evans and others have identified is actually due to the interest sensitivity of the demand for borrowed reserves and the definition linking nonborrowed and borrowed reserves. Consequently, the evidence suggests that the liquidity effect is nil.
|Date of creation:||1996|
|Contact details of provider:|| Postal: P.O. Box 442, St. Louis, MO 63166|
Web page: http://www.stlouisfed.org/
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Pagan, A.R. & Robertson, J.C., 1994.
"Resolving the Liquidity Effect,"
277, Australian National University - Department of Economics.
- Cosimano, Thomas F & Sheehan, Richard G, 1994. "Is the Conventional View of Discount Window Borrowing Consistent with the Behavior of Weekly Reporting Banks?," The Review of Economics and Statistics, MIT Press, vol. 76(4), pages 761-770, November.
- Cagan, Phillip & Gandolfi, Arthur, 1969. "The Lag in Monetary Policy as Implied by the Time Pattern of Monetary Effects on Interest Rates," American Economic Review, American Economic Association, vol. 59(2), pages 277-284, May.
- Bernanke, Ben S. & Mihov, Ilian, 1995.
"Measuring Monetary Policy,"
10, Institute for Advanced Studies.
- Coleman, Wilbur John, II & Gilles, Christian & Labadie, Pamela A, 1996.
"A Model of the Federal Funds Market,"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 337-357, February.
- Goodfriend, Marvin, 1991.
"Interest rates and the conduct of monetary policy,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 34(1), pages 7-30, January.
- Stephen M. Goldfeld & Edward J. Kane, 1966. "The Determinants Of Member‐Bank Borrowing: An Econometric Study," Journal of Finance, American Finance Association, vol. 21(3), pages 499-514, 09.
- Bernanke, Ben S & Blinder, Alan S, 1992.
"The Federal Funds Rate and the Channels of Monetary Transmission,"
American Economic Review,
American Economic Association, vol. 82(4), pages 901-921, September.
- Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
- Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
- Daniel L. Thornton, 1988. "The borrowed-reserves operating procedures: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 30-54.
- Leeper, Eric M. & Gordon, David B., 1992.
"In search of the liquidity effect,"
Journal of Monetary Economics,
Elsevier, vol. 29(3), pages 341-369, June.
- Eric M. Leeper & David B. Gordon, 1991. "In search of the liquidity effect," International Finance Discussion Papers 403, Board of Governors of the Federal Reserve System (U.S.).
- Eric M. Leeper & David B. Gordon, 1991. "In search of the liquidity effect," FRB Atlanta Working Paper 91-17, Federal Reserve Bank of Atlanta.
- Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
- Reichenstein, William, 1987. "The Impact of Money on Short-term Interest Rates," Economic Inquiry, Western Economic Association International, vol. 25(1), pages 67-82, January.
- Garfinkel, Michelle R & Thornton, Daniel L, 1995. "The Information Content of the Federal Funds Rate: Is It Unique?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 838-847, August.
- James A. Clouse, 1994. "Recent developments in discount window policy," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 965-977.
- Sims, Christopher A. & Zha, Tao, 2006.
"Does Monetary Policy Generate Recessions?,"
Cambridge University Press, vol. 10(02), pages 231-272, April.
- Peristiani, Stavros, 1991. "The Model Structure of Discount Window Borrowing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(1), pages 13-34, February.
- Lawrence J. Christiano & Martin Eichenbaum, 1991. "Identification and the Liquidity Effect of a Monetary Policy Shock," NBER Working Papers 3920, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:1996-002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.