The Effect of Money Shocks on Interest Rates in the Presence of Conditional Heteroskedasticity

  • Author(s): KEVIN B. GRIER, MARK J. PERRY
  • Published: Apr 30, 2012
  • Pages: 1445-1455
  • DOI: 10.1111/j.1540-6261.1993.tb04761.x

ABSTRACT

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.

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