Modelling the Interaction of Liquidity to Price Dynamics

Bodo Herzog

Economics Bulletin, 2020, vol. 40, issue 2, 1420-1430

Abstract: This paper studies the impact of financial liquidity on the macro-economy. We extend a classic macroeconomic model and compute numerical simulations. The model confirms that persistently low inflation can occur despite a high degree of financial liquidity due to a reallocation of cash, normal and risk-free bonds. In that regard, our model uncovers an explanation of a flat Phillips curve. Overall, our approach contributes to a rather disregarded matter in macroeconomic theory.

Keywords: Macroeconomic Theory; Liquidity; Flat Phillips Curve; Numerical Simulation; Modelling (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2020-06-02
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