Measuring the liquidity effect: The case of Japan

In this paper. we measure the liquidity effect in Japan, complementing the work done by E. Hayashi (2001, Int. Econ. Rei: 42, 287-316) and compare it to the liquidity effect in the United States. Since institutional features are similar across these two countries, we apply J. Hamilton's (1997, Amer Econ. Rev: 87. 80-97; 1998, Carnegie-Rochester Conf Ser. Public Pol 49, 1-44) methodology to estimate the liquidity effect for each day of the maintenance period. Detailed daily data supplied by the Bank of Japan enable us to obtain more accurate estimates for Japan. Our key findings, which are not found in F. Hayashi (2001, Int. Econ. Rev 42, 287-316) are as follows: (1) On the final day of a reserve maintenance period, bath countries show the strongest evidence of the liquidity effect, and (2) in both countries the liquidity effect tends to be larger and more statistically significant toward the end of the period. (C) 2002 Elsevier Science (USA).