This essay tests whether innovations in monetary policy are inversely linked with changes in interest rates. Using Mishkin’s efficient markets framework and the measures of policy innovations constructed by Boschen and Mills and Bemanke and Mihov, we find strong evidence that expansionary monetary policy shocks lower interest rates. We argue that the failure of most studies to find a significant liquidity effect is due to the endogeneity of the monetary aggregates which are used to measure policy shocks.