Liquidity Effects and the Monetary Transmission Mechanism
AbstractSeveral recent papers provide strong empirical support for the view that an expansionary monetary policy disturbance generates a persistent decrease in interest rates and a persistent increase in output and employment. Existing quantitative general equilibrium models, which allow for capital accumulation, are inconsistent with this view. There does exist a recently developed class of general equilibrium models which can rationalize the contemporaneous response of interest rates, output, and employment to a money supply shock. However, a key shortcoming of these models is that they cannot rationalize persistent liquidity effects. This paper discusses the basic frictions and mechanisms underlying this new class of models and investigates one avenue for generating persistence. We argue that once a simplified version of the model in Christiano and Eichenbaum (1991) is modified to allow for extremely small costs of adjusting sectoral flow of funds, positive money shocks generate long-lasting, quantitatively significant liquidity effects, as well as persistent increases in aggregate economic activity.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3974.
Date of creation: Jan 1992
Date of revision:
Publication status: published as American Economic Review, Papers and Preceedings Vol. 82, No. 2, pp. 346-353 May 1992
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Other versions of this item:
- Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Liquidity Effects and the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 82(2), pages 346-53, May.
- Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects and the monetary transmission mechanism," Staff Report, Federal Reserve Bank of Minneapolis 150, Federal Reserve Bank of Minneapolis.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lawrence J. Christiano, 1991. "Modeling the liquidity effect of a money shock," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 3-34.
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NBER Working Papers
3487, National Bureau of Economic Research, Inc.
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- Akerlof, George A, 1979. "Irving Fisher on His Head: The Consequences of Constant Threshold-Target Monitoring of Money Holdings," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(2), pages 169-87, May.
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