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Modeling the liquidity effect of a money shock

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  • Lawrence J. Christiano

Abstract

There is widespread agreement that a surprise increase in an economy's money supply drives the nominal interest rate down and economic activity up, at least in the short run. This is understood as reflecting the dominance of the liquidity effect of a money shock over an opposing force, the anticipated inflation effect. This paper illustrates why standard general equilibrium models have trouble replicating the dominant liquidity effect. It also studies several factors which have the potential to improve the performance of these models.

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Bibliographic Info

Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (1991)
Issue (Month): Win ()
Pages: 3-34

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Handle: RePEc:fip:fedmqr:y:1991:i:win:p:3-34:n:v.15no.1

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Related research

Keywords: Monetary policy ; Liquidity (Economics) ; Money supply;

References

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