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Liquidity, Transaction Costs, and Real Activity

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  • Junxi Zhang

Abstract

This paper studies the liquidity effect in a pecuniary transaction‐cost model. To model the asymmetric impact of monetary injections, we consider two behavioral assumptions: sluggish money demand and sluggish firm investment. It is found that, under reasonable parameterization, the model is capable of generating a dominant liquidity effect. Our result suggests that, with alternative monetary specifications and behavioral assumptions, general equilibrium models are still useful for studying the liquidity effect at business cycle frequencies.

Suggested Citation

  • Junxi Zhang, 1998. "Liquidity, Transaction Costs, and Real Activity," Southern Economic Journal, John Wiley & Sons, vol. 65(2), pages 308-321, October.
    • Handle: RePEc:wly:soecon:v:65:y:1998:i:2:p:308-321
    DOI: 10.1002/j.2325-8012.1998.tb00152.x
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    References listed on IDEAS

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