A simple model of liquidity

Emanuele Franceschi

Working Papers from HAL

Abstract: We introduce liquidity motives in an otherwise standard monetary model. The Central Bank's policy rule is adapted to target the interest rate on liquid bonds. These deviations are sufficient to relax the requirement for active monetary policy and warrant determi-nacy in both passive and active policy regimes. We compare this model of liquidity with workhorse models and find that it can substantially replicate usual dynamics. By means of stochastic simulations, we also study how monetary policy stance affect inflation dynamics and find evidence of increased persistence for passive monetary policy.

Date: 2020-10
New Economics Papers: this item is included in nep-mac and nep-mon
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Working Paper: A simple model of liquidity (2020)
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