Money, Banking and Interest Rates: Monetary Policy Regimes with Markov-Switching VECM Evidence

Max Gillman, Michal Kejak () and Giulia Ghiani

No 2014_3, CEU Working Papers from Department of Economics, Central European University

Abstract: The paper sets out theory and evidence for the equilibrium determination of the nominal interest rate. We test the cash-in-advance economy using US postwar data and find cointegration of the interest rate, inflation, unemployment and the money supply, using either M2 or M1 monetary aggregates, and the Federal Funds rate or the three month Treasury bill rate. Results are consistent both with a persistent monetary liquidity effect in the cointegrating vector coefficients and also a long run quantity theoretic relation. We identify three Markov-switching regimes similar to NBER contractions, expansions, and the "unconventional" period. Dropping money indicates model misspecification.

Date: 2014-10-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ceu:econwp:2014_3

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