The liquidity effect across the short end of the term structure

Garett Jones

Applied Financial Economics Letters, 2006, vol. 2, issue 3, 159-163

Abstract: Because the Federal Reserve is constantly responding to developments in the economy, it has been difficult to come up with convincing estimates of the effects of exogenous shifts in money supply on interest rates. This study uses exogenous, well-identified reserve supply shocks to estimate how money supply shocks that last one day impact short-term interest rates. The results imply that the one-day liquidity effect is substantial, and that it impacts 30- and 90-day private-sector credit markets more than the expectations theory of the term structure predicts. The effect on public debt is smaller and statistically insignificant, implying that reserve supply shocks widen the gap between interest rates on public and private debt.

Date: 2006
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DOI: 10.1080/17446540500461745

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