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

KEVIN B. GRIER; MARK J. PERRY

doi:10.1111/j.1540-6261.1993.tb04761.x

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

KEVIN B. GRIER, MARK J. PERRY

Free Market Institute

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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. 1993 The American Finance Association

Original language	English
Pages (from-to)	1445-1455
Number of pages	11
Journal	The Journal of Finance
Volume	48
Issue number	4
DOIs	https://doi.org/10.1111/j.1540-6261.1993.tb04761.x
State	Published - Sep 1993

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

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