| Abstract: | This study examines the importance of the liquidity effect, inflation uncertainty, and supply shocks in determining interest rates in a high inflation economy (Israel). The results show that a significant liquidity effect exists when it is measured by a broad definition of money. The vanishing liquidity effect, found in studies of the U.S., may be the result of the use of M, to measure it. There is some support for the hypothesis that the strength of the liquidity effect is negatively related to the level of inflation. Interest rates are negatively (and significantly) affected by inflation uncertainty, and positively affected by supply shocks. |
