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The Liquidity-Augmented Model of Macroeconomic Aggregates: A New Monetarist DSGE Approach

Author

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  • Athanasios Geromichalos

    (University of California, Davis)

  • Lucas Herrenbrueck

    (Simon Fraser University)

Abstract

We propose a new model of the macroeconomy which is simple and tractable, yet explicit about the foundations of liquidity. Monetary policy is implemented via swaps of money for liquid bonds in a secondary asset market. Prices are flexible, yet policy has real effects because money, bonds, and capital are imperfect substitutes, both in the short run and in the long run. The model unifies two classical channels through which the price of liquidity affects the economy (Friedman's real balance effect vs Mundell's and Tobin's asset substitution effect), and it shines light on important macroeconomic questions: the causal link between interest rates and inflation, the effects of money demand shocks, and the existence and persistence of a liquidity trap where interest rates are zero but inflation is positive. (Copyright: Elsevier)

Suggested Citation

  • Athanasios Geromichalos & Lucas Herrenbrueck, . "The Liquidity-Augmented Model of Macroeconomic Aggregates: A New Monetarist DSGE Approach," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  • Handle: RePEc:red:issued:19-205
    DOI: 10.1016/j.red.2021.05.002
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    More about this item

    Keywords

    Money and capital; Indirect liquidity; Open-market operations; Fisher equation; Liquidity trap;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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