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Business Liquidity, Consumer Liquidity, and Monetary Policy

Author

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  • Chao He

    (East China Normal University)

  • Min Zhang

    (East China Normal University)

Abstract

Existing studies of liquidity either focus on firms or consumers. However, both hold significant cash, and firms' share increased since the '90s and fell after the 07-08 financial crisis. We propose a theory of how endogenous investment liquidity and consumption liquidity compete and interact. The consumption-investment liquidity allocation (CILA) channel amplifies the effect of monetary policy on unemployment, as it accounts for 40 percent of the effect in the calibrated model. We also show that a lower nominal interest rate directs relatively more cash to firms, whereas financial frictions induce the opposite and high unemployment, consistent with the observed patterns.

Suggested Citation

  • Chao He & Min Zhang, 2019. "Business Liquidity, Consumer Liquidity, and Monetary Policy," 2019 Meeting Papers 869, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:869
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    References listed on IDEAS

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