The Liquidity Effect in the Federal Funds Market: Evidence at the Monthly Frequency
43 Pages Posted: 19 Oct 2006
Date Written: July 2006
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. Further, we explain how a lack of a clear institutional understanding may have contributed to the finding of a "liquidity puzzle" in the past.
Keywords: Liquidity Effect, Liquidity Puzzle, Monetary Aggregates
JEL Classification: E43, E52, E58
Suggested Citation: Suggested Citation