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

43 Pages Posted: 19 Oct 2006

See all articles by Seth B. Carpenter

Seth B. Carpenter

Federal Reserve Board - Department of Monetary Affairs

Selva Demiralp

Koc University - Department of Economics

Date Written: July 2006

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. 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

Carpenter, Seth B. and Demiralp, Selva, The Liquidity Effect in the Federal Funds Market: Evidence at the Monthly Frequency (July 2006). Available at SSRN: https://ssrn.com/abstract=938692 or http://dx.doi.org/10.2139/ssrn.938692

Seth B. Carpenter

Federal Reserve Board - Department of Monetary Affairs ( email )

20th and C Streets, NW
Mailstop 60
Washington, DC 20551
United States
202-452-2385 (Phone)
202-452-2301 (Fax)

Selva Demiralp (Contact Author)

Koc University - Department of Economics ( email )

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