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Liquidity Effects and Market Frictions

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Author Info

  • S. Hendry
  • G-J. Zhang

Abstract

The goal of this paper is to tackle two problems in standard limited-par- ticipation models: (1) an interest rate liquidity effect that is not as persist- ent as in the data; and (2) nominal variables that are unrealistically volatile. To address these problems, we introduce nominal wage and price rigidities, as well as portfolio adjustment costs and monopolistically com- petitive firms, to better understand how each of these costs affects the model economy.

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File URL: http://www.dnb.nl/binaries/sr029_tcm46-146807.pdf
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Bibliographic Info

Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 29.

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Length: 50 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:dnb:staffs:29

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References

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  1. Hendry, Scott & Zhang, Guang-Jia, 2001. "Liquidity Effects and Market Frictions," Journal of Macroeconomics, Elsevier, vol. 23(2), pages 153-176, April.
  2. David Andolfatto & Paul Gomme, 1997. "Monetary Policy Regimes and Beliefs," Cahiers de recherche CREFE / CREFE Working Papers 48, CREFE, Université du Québec à Montréal, revised Apr 2001.
  3. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," Econometrica, Econometric Society, vol. 68(5), pages 1151-1180, September.
  4. V. V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1994. "Inside money, outside money and short-term interest rates," Proceedings, Federal Reserve Bank of Cleveland, pages 1354-1401.
  5. Basu, S., 1993. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," Papers 93-23, Michigan - Center for Research on Economic & Social Theory.
  6. Cooley, Thomas F & Hansen, Gary D, 1991. "The Welfare Costs of Moderate Inflations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 483-503, August.
  7. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1997. "Sticky price and limited participation models of money: A comparison," European Economic Review, Elsevier, vol. 41(6), pages 1201-1249, June.
  8. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, pages 1241-1289.
  9. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  10. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  11. Julio J. Rotemberg, 1994. "Prices, Output and Hours: An Empirical Analysis Based on a Sticky Price Model," NBER Working Papers 4948, National Bureau of Economic Research, Inc.
  12. Thomas F. Cooley & Gary D. Hansen, 1987. "The Inflation Tax in a Real Business Cycle Model," UCLA Economics Working Papers 496, UCLA Department of Economics.
  13. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  14. Jang-Ok Cho & Thomas Cooley & Louis Phaneuf, 1994. "The Welfare Costs of Nominal Wage Contracting," Cahiers de recherche CREFE / CREFE Working Papers 30, CREFE, Université du Québec à Montréal, revised 22 Jan 1996.
  15. repec:nbr:nberre:0126 is not listed on IDEAS
  16. Lawrence J. Christiano & Martin Eichenbaum, 1991. "Identification and the Liquidity Effect of a Monetary Policy Shock," NBER Working Papers 3920, National Bureau of Economic Research, Inc.
  17. Armstrong, John & Black, Richard & Laxton, Douglas & Rose, David, 1998. "A robust method for simulating forward-looking models," Journal of Economic Dynamics and Control, Elsevier, vol. 22(4), pages 489-501, April.
  18. Coleman, Wilbur John, II, 1991. "Equilibrium in a Production Economy with an Income Tax," Econometrica, Econometric Society, vol. 59(4), pages 1091-1104, July.
  19. Michael Dotsey & Peter Ireland, 1993. "Liquidity effects and transactions technologies," Working Paper 93-01, Federal Reserve Bank of Richmond.
  20. Mankiw, N. Gregory (ed.), 1997. "Monetary Policy," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226503097, янваÑ.
  21. Martin Eichenbaum & Lawrence J. Christiano, 1992. "Liquidity Effects, Monetary Policy, and the Business Cycle," NBER Working Papers 4129, National Bureau of Economic Research, Inc.
  22. S. Rao Aiyagari, 1994. "Macroeconomics with frictions," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 24-40.
  23. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "The benefits of interest rate targeting: a partial and a general equilibrium analysis," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-14.
  24. Dow, James Jr., 1995. "The demand and liquidity effects of monetary shocks," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 91-115, August.
  25. Fung, Ben Siu-cheong & Kasumovich, Marcel, 1998. "Monetary shocks in the G-6 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 575-592, October.
  26. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
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Citations

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Cited by:
  1. Peter Ireland & Niki Papadopoulou, 2004. "Sticky Prices vs Limited Participation: What do we Learn from the Data?," Working Papers 2004_4, Business School - Economics, University of Glasgow.
  2. Hendry, S. & Zhang, G., 1998. "Liquidity Effects and Market Frictions," Working Papers 98-11, Bank of Canada.
  3. Karamé, Frédéric & Patureau, Lise & Sopraseuth, Thepthida, 2008. "Limited participation and exchange rate dynamics: Does theory meet the data?," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1041-1087, April.
  4. Patureau, Lise, 2007. "Pricing-to-market, limited participation and exchange rate dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3281-3320, October.
  5. Stracca, Livio, 2001. "Does liquidity matter? Properties of a synthetic divisia monetary aggregate in the euro area," Working Paper Series 0079, European Central Bank.
  6. Shamik Dhar & Stephen P Millard, 2000. "A limited participation model of the monetary transmission mechanism in the United Kingdom," Bank of England working papers 117, Bank of England.
  7. Laidler, David, 1999. "The Quantity of Money and Monetary Policy," Working Papers 99-5, Bank of Canada.
  8. Shamik Dhar & Stephen P Millard, 2000. "How well does a limited participation model of the monetary transmission mechanism match UK data?," Bank of England working papers 118, Bank of England.
  9. Dib, Ali, 2006. "Nominal rigidities and monetary policy in Canada," Journal of Macroeconomics, Elsevier, vol. 28(2), pages 303-325, June.
  10. Niki X. Papadopoulou, 2008. "Sticky Prices, Limited Participation, or Both?," Working Papers 2008-4, Central Bank of Cyprus.
  11. Niki Papadopoulou, 2006. "Sticky Prices vs. Limited Participation:What Do We Learn From the Data?," Computing in Economics and Finance 2006 418, Society for Computational Economics.
  12. Chung, Kyuil, 2009. "Does the liquidity effect guarantee a positive term premium?," Economic Modelling, Elsevier, vol. 26(5), pages 893-903, September.

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