Persistent Liquidity Effects and Long Run Money Demand

Fernando Alvarez and Francesco Lippi

No 8650, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We present a monetary model in the presence of segmented asset markets that im- plies 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. At the same time, the model has completely classical long-run predictions, featuring quantity theoretic and Fisherian properties. The model simultaneously explains the short-run "instability" of money demand estimates as-well-as the stability of long-run interest-elastic money demand.

Keywords: Money; demand (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Date: 2011-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Persistent Liquidity Effects and Long-Run Money Demand (2014)
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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