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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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    1. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
    2. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    3. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    4. Miquel Faig & Min Zhang, 2012. "Labor Market Cycles, Unemployment Insurance Eligibility, and Moral Hazard," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 41-56, January.
    5. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    6. Juliane Begenau & Berardino Palazzo, 2017. "Firm Selection and Corporate Cash Holdings," NBER Working Papers 23249, National Bureau of Economic Research, Inc.
    7. Guillaume Rocheteau & Randall Wright & Cathy Zhang, 2018. "Corporate Finance and Monetary Policy," American Economic Review, American Economic Association, vol. 108(4-5), pages 1147-1186, April.
    8. repec:oup:rfinst:v:31:y:2018:i:11:p:4288-4344. is not listed on IDEAS
    9. repec:bla:jacrfn:v:30:y:2018:i:4:p:36-60 is not listed on IDEAS
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