The Daily Liquidity Effect
FRB of St. Louis Working Paper No. 2006-020A
44 Pages Posted: 14 Apr 2006
Date Written: April 2006
Abstract
Motivated, on the one hand, by the belief that the Fed controls the short-term rate through open market operations, and on the other, by "the lack of convincing proof that this is what happens," Hamilton (1997) suggested that more convincing evidence of the liquidity effect could be obtained with the use of high-frequency (daily) data. Thornton's (2001a) detailed analysis of Hamilton's results and evidence using both Hamilton's and an alternative methodology indicates a quantitatively unimportant daily liquidity effect. Recently, Carpenter and Demiralp (2006) report "clear evidence" of a daily liquidity effect using a more comprehensive reserve-supply-shock measure than that used by Hamilton. This paper investigates the daily liquidity effect using Carpenter and Demiralp's new measure.
Keywords: federal funds rate target, monetary policy, operating procedure, FOMC
JEL Classification: E40, E52
Suggested Citation: Suggested Citation
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