Advanced Search
MyIDEAS: Login to save this paper or follow this series

Liquidity Effects in non-Ricardian Economies

Contents:

Author Info

  • Jean-Pascal Benassy

Abstract

This paper investigates a new mechanism through which "liquidity effects" (i.e. a negative response of the nominal interest rate to monetary injections) can be introduced into dynamic stochastic general equilibrium (DSGE) models. As it turns out, this liquidity effect has been found difficult to obtain in standard monetary DSGE models. The reason is an "inflationary expectations effect": when an unexpected money injection occurs, this creates the expectation of further money increases in the future, which itself creates the expectation of future inflation. From Fisher's equation this will tend, ceteris paribus, to raise the nominal interest rate. Inspite of this effect, one can find in the literature a few models and mechanisms which introduce a liquidity effect in DSGE models. Two prominent ones are: (1) Models of limited participation where households cannot adapt immediately their financial portfolios when a monetary policy shock occurs. (2) Models of sticky prices, where prices are preset in advance. In this paper we explore a third avenue, which we call "non-Ricardian". By non-Ricardian we mean models, like the overlapping generations model of Samuelson (1958), where new agents are born every period, and where "Ricardian equivalence" does not hold. We argue that the non-Ricardian character of these economies is conducive to a liquidity effect. Indeed in Ricardian economies the value of financial assets is matched by an equivalent value of future discounted taxes, so that they are not real wealth to the agents. Instead in non-Ricardian economies part of the agent's financial wealth represents real wealth to them, because they can pass it to later generations against real goods, and the next generations will bear part of the tax burden. As a result this creates an effect similar to Patinkin's (1956) famed "real balance effect". This effect itself gives rise to the liquidity effect. In order to make this intuition more formal, we use a model adapted from that of Weil (1987, 1991) which "nests" the usual Ricardian model with an infinitely lived consumer. Households never die, but new "generations" are born each period at a rate n. After long calculations we find an equation giving the interest rate as the sum of two terms: the first one displays the "inflationary expectations" effect. The second one gives the liquidity effect described above. That second effect is present only if n>0, i.e. if the economy is actually non-Ricardian, and it is greater the higher n is. We give sufficient condition for this liquidity effect to overrule the inflationary expectations effect, and to be persistent in tim

Download Info

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 435.

as in new window
Length:
Date of creation: 2004
Date of revision:
Handle: RePEc:red:sed004:435

Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Email:
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC

Related research

Keywords: Liquidity effects; Monetary shocks;

Other versions of this item:

Find related papers by JEL classification:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Araújo, Eurilton, 2008. "Robust Monetary Policy with the Consumption-Wealth Channel," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_110, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  2. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, Elsevier, vol. 29(4), pages 708-723, December.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:red:sed004:435. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.