Identifying credit and liquidity effects using a rank condition

R. D. Rossiter

Applied Financial Economics, 1998, vol. 8, issue 5, 469-475

Abstract: The paper investigates whether credit and liquidity views of monetary policy transmission can be identified as separate elements of a system which has multiple cointegration vectors. Likelihood ratio analysis is used to determine the empirical validity of the commercial paper - Treasury bill spread and Johansen's rank condition tests identification restrictions for individual cointegration vectors. By imposing structural restrictions on a system of income, M2 and short-term interest rates, it is possible to generically identify individual cointegration vectors representing the credit and liquidity views, respectively, while a third vector is identified as a stationary relationship of short-term rates.

Date: 1998
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DOI: 10.1080/096031098332763

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