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Liquidity Effects and Market Frictions

  • S. Hendry
  • G-J. Zhang

The goal of this paper is to tackle two problems in standard limited-par- ticipation models: (1) an interest rate liquidity effect that is not as persist- ent as in the data; and (2) nominal variables that are unrealistically volatile. To address these problems, we introduce nominal wage and price rigidities, as well as portfolio adjustment costs and monopolistically com- petitive firms, to better understand how each of these costs affects the model economy.

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Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 29.

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Length: 50 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:dnb:staffs:29
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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Working Paper Series, Macroeconomic Issues WP-96-28, Federal Reserve Bank of Chicago.
  2. Lawrence J. Christiano & Martin Eichenbaum, 1991. "Identification and the Liquidity Effect of a Monetary Policy Shock," NBER Working Papers 3920, National Bureau of Economic Research, Inc.
  3. Michael Dotsey & Peter N. Ireland, 1993. "Liquidity effects and transactions technologies," Working Paper 93-01, Federal Reserve Bank of Richmond.
  4. David Andolfatto & Paul Gomme, 1997. "Monetary policy regimes and beliefs," Discussion Paper / Institute for Empirical Macroeconomics 118, Federal Reserve Bank of Minneapolis.
  5. Cho, Jang-Ok & Cooley, Thomas F & Phaneuf, Louis, 1997. "The Welfare Cost of Nominal Wage Contracting," Review of Economic Studies, Wiley Blackwell, vol. 64(3), pages 465-84, July.
  6. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "The benefits of interest rate targeting: a partial and a general equilibrium analysis," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-14.
  7. Wilbur John Coleman, 1989. "Equilibrium in a production economy with an income tax," International Finance Discussion Papers 366, Board of Governors of the Federal Reserve System (U.S.).
  8. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-77, November.
  9. Julio J. Rotemberg, 1994. "Prices, Output and Hours: An Empirical Analysis Based on a Sticky Price Model," NBER Working Papers 4948, National Bureau of Economic Research, Inc.
  10. Christiano, Lawrence J & Eichenbaum, Martin, 1995. "Liquidity Effects, Monetary Policy, and the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1113-36, November.
  11. Cooley, Thomas F & Hansen, Gary D, 1991. "The Welfare Costs of Moderate Inflations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 483-503, August.
  12. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1996. "Sticky Price Models of the Business Cycle: Can the Contract Multiplier Solve the Persistence Problem?," NBER Working Papers 5809, National Bureau of Economic Research, Inc.
  13. repec:nbr:nberre:0126 is not listed on IDEAS
  14. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," Papers 88-05, Rochester, Business - General.
  15. V.V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1995. "Inside money, outside money and short term interest rates," Working Paper Series, Macroeconomic Issues 95-13, Federal Reserve Bank of Chicago.
  16. Dow, James Jr., 1995. "The demand and liquidity effects of monetary shocks," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 91-115, August.
  17. Susanto Basu, 1994. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," NBER Working Papers 4817, National Bureau of Economic Research, Inc.
  18. Armstrong, John & Black, Richard & Laxton, Douglas & Rose, David, 1998. "A robust method for simulating forward-looking models," Journal of Economic Dynamics and Control, Elsevier, vol. 22(4), pages 489-501, April.
  19. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  20. Hendry, S. & Zhang, G., 1998. "Liquidity Effects and Market Frictions," Working Papers 98-11, Bank of Canada.
  21. Ben S.C. Fung & Marcel Kasumovich, 1997. "Monetary Shocks in the G-6 Countries: Is There a Puzzle?," Working Papers 97-7, Bank of Canada.
  22. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  23. Mankiw, N. Gregory (ed.), 1997. "Monetary Policy," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226503097.
  24. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  25. Fung, Ben Siu-cheong & Kasumovich, Marcel, 1998. "Monetary shocks in the G-6 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 575-592, October.
  26. S. Rao Aiyagari, 1994. "Macroeconomics with frictions," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 24-40.
  27. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
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