The Return of the Liquidity Effect: A Study of the Short-Run Relation Between Money Growth and Interest Rates

John H. Cochrane

93 citations0/0 files storedJournal of Business and Economic Statistics

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Economic theories and models

Abstract

In this article, I use band-pass filters to investigate the short-run relationship between money growth and interest rates. I find a negative correlation between short-run movements in money growth and interest rates, which I interpret as evidence that the liquidity effect dominates the anticipated inflation effect.

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References

1995The Role of Monetary Policy 1982Measurement of Linear Dependence and Feedback Between Multiple Time Series 2016Staggered Wage Setting in a Macro Model 1985Money and Interest in a Cash-in-Advance Economy 1984Money and Interest in Cash-In-Advance Economy 20124 Two Illustrations of the Quantity Theory of Money 1974Band Spectrum Regression 1982A Transactions-Based Model of the Monetary Transmission Mechanism

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2006The Liquidity Effect in the Federal Funds Market: Evidence from Daily Open Market Operations 1991Modeling the Liquidity Effect of a Money Shock 2002The Fed and Interest Rates: A High-Frequency Identification 1995The liquidity effect: Identifying short-run interest rate dynamics using long-run restrictions 2007Money growth, output gaps and inflation at low and high frequency: Spectral estimates for Switzerland 2001The Federal Reserve’s operating procedure, nonborrowed reserves, borrowed reserves and the liquidity effect

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