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- Title
ESTIMATION OF THE LIQUIDITY TRAP USING SPLINE FUNCTIONS.
- Authors
Barth, James; Kraft, Arthur; Kraft, John
- Abstract
This article presents liquidity-trap hypothesis using spline functions. Almost all discussions concerning the importance of money in affecting economic activity make reference to the liquidity-trap hypothesis. This important hypothesis states that the elasticity of the demand for money with respect to the rate of interest becomes infinite at low interest rates. The purpose of this article is to test the liquidity-trap hypothesis by employing spline functions. Briefly, these functions represent a special class of approximating functions, which allow the dependent variable in a regression to take on different functional relationships with respect to the independent variable in various subintervals of the domain of the independent variable in a continuous fashion. In this way, the problem inherent in previous studies using ordinary least squares techniques can be avoided, permitting a more direct test of the liquidity-trap hypothesis. On the other hand, spline functions are used extensively in the applied phase of numerical analysis where, because of strong convergence properties, they serve as an effective tool in the elementary processes of interpolation and approximation.
- Subjects
LIQUIDITY (Economics); DEMAND for money; SPLINE theory; INTEREST rates; BUSINESS cycles; APPROXIMATION theory; INTERPOLATION
- Publication
Review of Economics & Statistics, 1976, Vol 58, Issue 2, p218
- ISSN
0034-6535
- Publication type
Article
- DOI
10.2307/1924028