The Liquidity-Augmented Model of Macroeconomic Aggregates: A New Monetarist DSGE Approach

Athanasios Geromichalos and Lucas Herrenbrueck

Review of Economic Dynamics, 2022, vol. 45, 134-167

Abstract: We propose a new model of the macroeconomy which is simple and tractable, yet explicit about the foundations of liquidity. Monetary policy is implemented via swaps of money for liquid bonds in a secondary asset market. Prices are flexible, yet policy has real effects because money, bonds, and capital are imperfect substitutes, both in the short run and in the long run. The model unifies two classical channels through which the price of liquidity affects the economy (Friedman's real balance effect vs Mundell's and Tobin's asset substitution effect), and it shines light on important macroeconomic questions: the causal link between interest rates and inflation, the effects of money demand shocks, and the existence and persistence of a liquidity trap where interest rates are zero but inflation is positive. (Copyright: Elsevier)

Keywords: Money and capital; Indirect liquidity; Open-market operations; Fisher equation; Liquidity trap (search for similar items in EconPapers)
JEL-codes: E31 E43 E44 E52 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (13)

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DOI: 10.1016/j.red.2021.05.002

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