Cash Setting, the Call Loan Rate, and the Liquidity Effect in Canada

Ben Fung and Rohit Gupta

Canadian Journal of Economics, 1997, vol. 30, issue 4, 1057-82

Abstract: In this paper, the authors use the vector autoregression method to examine the effects of monetary policy in Canada including the empirical evidence of the liquidity effect in particular. They use the excess cash reserves of the chartered banks and the surprise component of excess cash reserves as measures of liquidity. Shocks to monetary policy are measured by the orthogonalized innovations to the liquidity variables and by the orthogonalized innovations to the call loan rate. The authors find that the effects of these shocks conform to monetary policy shocks and the results support the presence of the liquidity effect in Canada.

Date: 1997
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