The daily liquidity effect

Daniel Thornton ()

No 2006-020, Working Papers from Federal Reserve Bank of St. Louis

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: Interest rates; Open market operations; Monetary policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2006
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