Testing the Liquidity Preference Hypothesis using Survey Forecasts

Jose Ornelas and Antonio Jr

No 353, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: We evaluate the Liquidity Preference Hypothesis (LPH) for the term structure of interest rates in a different way. Instead of using bond returns as traditional approaches, we use interest rate surveys with market expectations in order to evaluate LPH. This approach allows us to disentangle the effect of the changes in interest rate expectations from the liquidity premium. We found empirical support for the LPH with Brazilian data using both traditional and survey methods. However, the evaluation with interest rate surveys gives a higher statistical confidence level than the traditional approach when we perform tests for term premium monotonicity.

Date: 2014-04
New Economics Papers: this item is included in nep-mon
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Journal Article: Testing the liquidity preference hypothesis using survey forecasts (2015)
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