Business Liquidity, Consumer Liquidity, and Monetary Policy

Chao He and Min Zhang
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Min Zhang: East China Normal University

No 869, 2019 Meeting Papers from Society for Economic Dynamics

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.

Date: 2019
New Economics Papers: this item is included in nep-cba, nep-cna and nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:869

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