Testing the liquidity effect with equilibrium interest rate

Liu Zhentao

Applied Economics, 2008, vol. 40, issue 12, 1529-1535

Abstract: We examine the existence of liquidity effects by using the equilibrium interest rates estimated from the disequilibrium analysis instead of the observed interest rate. The use of equilibrium interest rates allows us to take the growth rate in the money supply as being exogenous and circumvent the identification problem away. Following the traditional AR model and the method proposed by Hamilton (1997), we obtain evidences showing the negative relationship between the equilibrium interest rate and the growth rate in money supply.

Date: 2008
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DOI: 10.1080/00036840600820689

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