Persistent Liquidity Effects and Long Run Money Demand
Fernando E. Alvarez and
No 17566, NBER Working Papers from National Bureau of Economic Research, Inc
We present a monetary model in the presence of 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. 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.
JEL-codes: E31 E4 E41 E43 E5 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Published as Fernando Alvarez & Francesco Lippi, 2014. "Persistent Liquidity Effects and Long-Run Money Demand," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(2), pages 71-107, April.
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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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