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The liquidity effect in a flexible-price monetary model


  • Shiu-Sheng Chen


This paper examines the impact of macroeconomic policy shocks in a flexible-price dynamic stochastic general equilibrium (DSGE) model with money. Rather than adopting a money supply rule, monetary policy is modelled as a central bank using a simple interest rate rule (Taylor rule). Without assuming price stickiness or frictions in financial markets, this model is found to account for liquidity effects, generate higher persistence in output and inflation, and capture the positive unconditional cross-correlations relating inflation and output. Copyright 2008 , Oxford University Press.

Suggested Citation

  • Shiu-Sheng Chen, 2008. "The liquidity effect in a flexible-price monetary model," Oxford Economic Papers, Oxford University Press, vol. 60(1), pages 122-142, January.
  • Handle: RePEc:oup:oxecpp:v:60:y:2008:i:1:p:122-142

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