The Daily and Policy-Relevant Liquidity Effects
FRB of St. Louis Working Paper No. 2007-001B
31 Pages Posted: 5 Jan 2007
Date Written: January 2007
Abstract
The phrase "liquidity effect" was introduced by Milton Friedman (1969) to describe the first of three effects on interest rates caused by an exogenous change in the money supply. The lack of empirical support for the liquidity effect using monthly and quarterly data led Hamilton (1997) to suggest that more convincing evidence of this effect could be obtained using daily data - estimating the daily liquidity effect. This paper investigates the implications of the daily liquidity effect for Friedman's (policy-relevant) liquidity effect using a comprehensive model of the Fed's daily operating procedure. The evidence indicates that it is no easier to find convincing evidence of a policy-relevant liquidity effect using daily data than it has been using lower frequency data.
Keywords: liquidity effect, federal funds rate, monetary policy, operating
JEL Classification: E4, E52
Suggested Citation: Suggested Citation
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