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

KEVIN B. GRIER

17 citations0/0 files storedThe Journal of Finance

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Monetary Policy and Economic Impact Financial Risk and Volatility Modeling Economic theories and models

Abstract

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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References

1986Generalized autoregressive conditional heteroskedasticity 1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 1985A Theory of the Term Structure of Interest Rates 1992ARCH modeling in finance 1995The Role of Monetary Policy 1987Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model 1985An Intertemporal General Equilibrium Model of Asset Prices 1992Interpreting the macroeconomic time series facts

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