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Structural Models of the Liquidity Effect

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  • Pagan, A.R.
  • Robertson, J.C.

Abstract

In this paper we examine a number of recent studies that claim to have obtained a well-defined liquidity effect using structural VAR models based on broad measures of money. These studies can be distinguished in terms of the identifying restrictions, sample periods, and frequency of data used. We show that estimation of the structural coefficients of all these models can be achieved by instrumental-variable methods, where the instruments are predetermined variables and the estimated structural errors from other equations in the system. Overall, our judgment is that the evidence for a liquidity effect from these studies is much less certain than suggested in the original papers, primarily because of the poor quality of the instruments used in estimation and the sensitivity of the estimates to the sample period used. © 1998 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology
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Suggested Citation

  • Pagan, A.R. & Robertson, J.C., 1995. "Structural Models of the Liquidity Effect," Papers 283, Australian National University - Department of Economics.
  • Handle: RePEc:fth:aunaec:283
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    References listed on IDEAS

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    1. Hansen, Bruce E, 1992. "Consistent Covariance Matrix Estimation for Dependent Heterogeneous Processes," Econometrica, Econometric Society, vol. 60(4), pages 967-972, July.
    2. Hylleberg, S. & Engle, R. F. & Granger, C. W. J. & Yoo, B. S., 1990. "Seasonal integration and cointegration," Journal of Econometrics, Elsevier, pages 215-238.
    3. Harvey, Andrew & Scott, Andrew, 1994. "Seasonality in Dynamic Regression Models," Economic Journal, Royal Economic Society, vol. 104(427), pages 1324-1345, November.
    4. Perron, Pierre & Rodriguez, Gabriel, 2003. "GLS detrending, efficient unit root tests and structural change," Journal of Econometrics, Elsevier, pages 1-27.
    5. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    6. Leybourne, S J & McCabe, B P M, 1994. "A Consistent Test for a Unit Root," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 157-166, April.
    7. Hannan, E J & Terrell, R D & Tuckwell, N E, 1970. "The Seasonal Adjustment of Economic Time Series," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(1), pages 24-52, February.
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    Keywords

    ECONOMETRICS; ECONOMIC MODELS;

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