Premium
The Liquidity Effect in the Federal Funds Market: Evidence at the Monthly Frequency
Author(s) -
CARPENTER SETH,
DEMIRALP SELVA
Publication year - 2008
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2008.00102.x
Subject(s) - federal funds , market liquidity , monetary economics , economics , open market operation , interest rate , liquidity trap , monetary policy , money market , quantitative easing , interbank lending market , liquidity crisis , central bank
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. Furthermore, we explain how a lack of a clear institutional understanding may have contributed to the finding of a “liquidity puzzle” in the past.