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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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File URL: http://www.dnb.nl/binaries/sr029_tcm46-146807.pdf
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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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Web page: http://www.dnb.nl/en/

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  1. Basu, Susanto, 1995. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," American Economic Review, American Economic Association, vol. 85(3), pages 512-31, June.
  2. Michael Dotsey & Peter N. Ireland, 1993. "Liquidity effects and transactions technologies," Working Paper 93-01, Federal Reserve Bank of Richmond.
  3. Hendry, S. & Zhang, G., 1998. "Liquidity Effects and Market Frictions," Staff Working Papers 98-11, Bank of Canada.
  4. Cooley, T.F. & Hansen, G.D., 1991. "The Welfare Costs of Moderate Inflations," Papers 90-04, Rochester, Business - General.
  5. 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.).
  6. V. V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1994. "Inside money, outside money and short-term interest rates," Proceedings, Federal Reserve Bank of Cleveland, pages 1354-1401.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September.
  12. 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.
  13. repec:nbr:nberre:0126 is not listed on IDEAS
  14. Mankiw, N. Gregory (ed.), 1997. "Monetary Policy," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226503097, April.
  15. Ben S.C. Fung & Marcel Kasumovich, 1997. "Monetary Shocks in the G-6 Countries: Is There a Puzzle?," Staff Working Papers 97-7, Bank of Canada.
  16. Martin Eichenbaum & Lawrence J. Christiano, 1992. "Liquidity Effects, Monetary Policy, and the Business Cycle," NBER Working Papers 4129, National Bureau of Economic Research, Inc.
  17. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Staff Report 227, Federal Reserve Bank of Minneapolis.
  18. David Andolfatto & Paul Gomme, 2001. "Monetary policy regimes and beliefs," Working Paper 9905, Federal Reserve Bank of Cleveland.
  19. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  20. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, pages 1241-1289.
  21. 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.
  22. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  23. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  24. Jang-Ok Cho & Thomas F. Cooley & Louis Phaneuf, 1997. "The Welfare Cost of Nominal Wage Contracting," Review of Economic Studies, Oxford University Press, vol. 64(3), pages 465-484.
  25. Dow, James Jr., 1995. "The demand and liquidity effects of monetary shocks," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 91-115, August.
  26. S. Rao Aiyagari, 1994. "Macroeconomics with frictions," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 24-40.
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