The Effect of Money Shocks on Interest Rates in the Presence of Conditional Heteroskedasticity
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- Author(s): KEVIN B. GRIER, MARK J. PERRY
- Published: Apr 30, 2012
- Pages: 1445-1455
- DOI: 10.1111/j.1540-6261.1993.tb04761.x
Most current empirical work finds no evidence that money shocks lower interest rates. We show that these nonresults are mainly due to a failure to model the conditional heteroskedasticity of interest rates. Autoregressive conditional heteroskedasticity (ARCH) models find a significant liquidity effect where ordinary least squares (OLS) models do not. The existence of a liquidity effect is found using different models and sample periods when ARCH models are used in estimation, but never when OLS is employed.