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

Authors

  • KEVIN B. GRIER,

  • MARK J. PERRY

    Search for more papers by this author
    • The authors are from George Mason University. We thank Tyler Cowen, Tim Sugrue, and Robert Tollison, along with René Stulz and an anonymous referee, for valuable comments and suggestions.

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.

Ancillary