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Liquidity, Monetary Policy, and the Financial Crisis: A New Monetarist Approach

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  • Stephen D. Williamson

Abstract

A model of public and private liquidity integrates financial intermediation theory with a New Monetarist monetary framework. Non-passive fiscal policy and costs of operating a currency system imply that an optimal policy deviates from the Friedman rule. A liquidity trap can exist in equilibrium away from the Friedman rule, and there exists a permanent nonneutrality of money, driven by an illiquidity effect. Financial frictions can produce a financial-crisis phenomenon that can be mitigated by conventional open market operations working in an unconventional manner. Private asset purchases by the central bank are either irrelevant or they reallocate credit and redistribute income. (JEL E13, E44, E52, E62, G01)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 6 (October)
Pages: 2570-2605

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Handle: RePEc:aea:aecrev:v:102:y:2012:i:6:p:2570-2605

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  1. repec:cto:journl:v:20:y:2001:i:3:p:452-465 is not listed on IDEAS
  2. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  3. Aleksander Berentsen & Gabriele Camera, 2004. "Money, Credit, and Banking," 2004 Meeting Papers 473, Society for Economic Dynamics.
  4. Ricardo Lagos & Guillaume Rocheteau, 2004. "Money and capital as competing media of exchange," Staff Report 341, Federal Reserve Bank of Minneapolis.
  5. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  6. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  7. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  8. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
  9. Williamson, Stephen D, 1987. "Financial Intermediation, Business Failures, and Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1196-1216, December.
  10. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
  11. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. This is not rocket science
    by David Andolfatto in MacroMania on 2013-04-15 21:31:00
  2. Saturday Entertainment: What's Krugman Doing with his AD/AS Model Now?
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2013-08-03 22:54:00
  3. Liquidity Premia and the Monetary Policy Trap
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2013-11-27 21:52:00
  4. Does QE cause deflation?
    by Noah Smith in Noahpinion on 2013-12-02 01:11:00
  5. The most damning critique of DSGE
    by Noah Smith in Noahpinion on 2014-01-10 06:15:00
  6. Where has Tobin Gone?
    by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2014-02-15 23:35:00
  7. Unconventional Monetary Policy in an Interconnected World!
    by paragwaknis in Musings of the Sorts on 2014-04-15 19:54:42
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Cited by:
  1. Aleksander Berentsen & Alessandro Marchesiani & Christopher J. Waller, 2013. "Floor systems for implementing monetary policy: Some unpleasant fiscal arithmetic," ECON - Working Papers 121, Department of Economics - University of Zurich, revised Sep 2013.
  2. Williamson, Stephen D., 2014. "Scarce collateral, the term premium, and quantitative easing," Working Papers 2014-8, Federal Reserve Bank of St. Louis.
  3. Meixing Dai & Frédéric Dufourt & Qiao Zhang, 2013. "Large Scale Asset Purchases with Segmented Mortgage and Corporate Loan Markets," Working Papers halshs-00842279, HAL.
  4. Stephen Williamson, 2014. "The Balance Sheet and the Future of Fed Policy," Open Economies Review, Springer, vol. 25(1), pages 163-170, February.
  5. Thorsten Beck & Andrea Colciago & Damjan Pfajfar, 2014. "The role of financial intermediaries in monetary policy transmission," DNB Working Papers 420, Netherlands Central Bank, Research Department.
  6. Chao Gu & Joseph Haslag, 2014. "Unconventional Optimal Open Market Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(3), pages 543-558, July.

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