Journal Article

The relationship between the daily and policy-relevant liquidity effects


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 monetary and reserve aggregates data led Hamilton (1997) to suggest that more convincing evidence of the liquidity effect could be obtained with daily data - the daily liquidity effect. This paper investigates the implications of the daily liquidity effect for Friedman's liquidity effect using a more comprehensive model of the Federal Reserve's daily operating procedure than has been previously used in the literature. The evidence indicates that it is no easier to find convincing evidence of a Friedman liquidity effect using daily data than it has been with lower-frequency monthly and quarterly data.

Keywords: Liquidity (Economics); Monetary policy;

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Review

Publication Date: 2010

Volume: 92

Issue: Jan

Pages: 73-88