Persistent Liquidity Effects and Long-Run Money Demand

Fernando Alvarez and Francesco Lippi

American Economic Journal: Macroeconomics, 2014, vol. 6, issue 2, 71-107

Abstract: We present a monetary model with segmented asset markets that implies a persistent fall in interest rates after a once and for all increase in liquidity. The gradual propagation mechanism produced by our model is novel in the literature. We provide an analytical characterization of this mechanism, showing that the magnitude of the liquidity effect on impact, and its persistence, depend on the ratio of two parameters: the long-run interest rate elasticity of money demand and the intertemporal substitution elasticity. The model simultaneously explains the short-run "instability" of money demand estimates as-well-as the stability of long-run interest-elastic money demand.

JEL-codes: E13 E31 E41 E43 E52 E62 (search for similar items in EconPapers)
Date: 2014
Note: DOI: 10.1257/mac.6.2.71
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Citations: View citations in EconPapers (18)

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Related works:
Working Paper: Persistent Liquidity Effects and Long Run Money Demand (2011)
Working Paper: Persistent Liquidity Effects and Long Run Money Demand (2011)
Working Paper: Persistent Liquidity Effect and Long Run Money Demand (2010)
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